**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

| **x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                              |                                                                                                    |   |
| **For the  quarterly period ended June 30, 2007** |
|                                              |                                                                                                    |   |
| **or**                                            |
|                                              |                                                                                                    |   |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from            to            **

**CommissionFile Number 000-50405**

**ACUSPHERE,INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                     |   | **04-3208947**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |                               |
| **500  Arsenal Street**                                          |   | ** **                         |
| **Watertown,  Massachusetts**                                    |   | **02472**                          |
| (Address of  principal executive offices)                        |   | (Zip Code)                         |

 

Registrant’sTelephone Number, Including Area Code: **(617)648-8800**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
|  | Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|--|--------------------------------|--------------------------|------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b 2 of theExchange Act). Yes o  No x

As of August 6, 2007there were 46,181,860 shares of the registrant’s common stock, $.01 par valueper share, outstanding.

 

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**ACUSPHERE, INC.**

**Form 10-Q**

**For the Quarterly Period EndedJune 30, 2007**

**CONTENTS**
|                                                                                                      | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|
| PART I:  FINANCIAL INFORMATION                                                                       |       |       |
| Item  1. Consolidated Financial Statements                                                           |       |       |
| Consolidated Balance Sheets:                                                                         |       |       |
| June 30, 2007 (Unaudited) and  December 31, 2006                                                     |       |       |
| Consolidated Statements of  Operations (Unaudited):                                                  |       |       |
| Three and Six Months ended  June 30, 2007 and 2006                                                   |       |       |
| Consolidated Statements of  Cash Flows (Unaudited):                                                  |       |       |
| Six Months ended June 30,  2007 and 2006                                                             |       |       |
| Notes to  Consolidated Financial Statements (Unaudited)                                              |       |       |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |       |       |
| Item 3.  Quantitative and Qualitative Disclosure about Market Risk                                   |       |       |
| Item 4. Controls and  Procedures                                                                     |       |       |
| PART II: OTHER  INFORMATION                                                                          |       |       |
| Item 1. Legal Proceedings                                                                            |       |       |
| Item  1A. Risk Factors                                                                               |       |       |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 |       |       |
| Item 3.  Defaults Upon Senior Securities                                                             |       |       |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         |       |       |
| Item 5. Other Information                                                                            |       |       |
| Item  6. Exhibits                                                                                    |       |       |
| Signature                                                                                            |       |       |

 

2

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**PART I:FINANCIAL INFORMATION**

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

**ACUSPHERE, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(inthousands except share data)**
| ** **                                                                                                                                                                                                                                                                                                                                         | ** ** | **As of**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31, ** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                         | ** ** | **2007**          | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                         | ** ** | **(unaudited)**   | ** ** | ** ** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                         |       |              |       |   |   |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                                    |       |              |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                                         |       | $                 | 52,133     |   | $ | 59,750 |   |
| Other current  assets                                                                                                                                                                                                                                                                                                                              |       | 1,006             |       | 841 |   |
| Total current  assets                                                                                                                                                                                                                                                                                                                              |       | 53,139            |       | 60,591 |   |
|                                                                                                                                                                                                                                                                                                                                               |       |              |       |   |   |
| PROPERTY AND EQUIPMENT,  at cost:                                                                                                                                                                                                                                                                                                                  |       |              |       |   |   |
| Property and  equipment                                                                                                                                                                                                                                                                                                                            |       | 54,786            |       | 54,507 |   |
| Less accumulated  depreciation and amortization                                                                                                                                                                                                                                                                                                    |       | 26,773            |       | 22,054 |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                       |       | 28,013            |       | 32,453 |   |
|                                                                                                                                                                                                                                                                                                                                               |       |              |       |   |   |
| OTHER ASSETS                                                                                                                                                                                                                                                                                                                                       |       | 1,643             |       | 1,778 |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                                                       |       | $                 | 82,795     |   | $ | 94,822 |   |
|                                                                                                                                                                                                                                                                                                                                               |       |              |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                     | ** ** | ** **        | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                               |       |              |       |   |   |
| Current portion  of long-term obligations                                                                                                                                                                                                                                                                                                          |       | $                 | 7,230      |   | $ | 12,899 |   |
| Current portion  of deferred revenue                                                                                                                                                                                                                                                                                                               |       | 2,667             |       | 2,667 |   |
| Derivative  liability                                                                                                                                                                                                                                                                                                                              |       | 14                |       | 59 |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                   |       | 2,052             |       | 2,615 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                   |       | 5,138             |       | 4,085 |   |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                         |       | 17,101            |       | 22,325 |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                                                                                                                                             |       |              |       |   |   |
| Long-term  obligations, net of current portion                                                                                                                                                                                                                                                                                                     |       | 12,012            |       | 9,381 |   |
| Deferred  revenue, net of current portion                                                                                                                                                                                                                                                                                                          |       | 3,333             |       | 4,667 |   |
| Total long-term  liabilities                                                                                                                                                                                                                                                                                                                       |       | 15,345            |       | 14,048 |   |
| COMMITMENTS                                                                                                                                                                                                                                                                                                                                        |       |              |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                                                                                                         |       |              |       |   |   |
| Preferred stock,  $0.01 par value per share                                                                                                                                                                                                                                                                                                        |       |              |       |   |   |
| Authorized  - 5,000,000 shares as of June 30, 2007 and December 31, 2006; Designated 6.5%  convertible exchangeable-1,000,000 shares as of June 30, 2007 and  December 31, 2006; issued and outstanding 690,000 shares as of June 30,  2007 and 730,000 shares at December 31, 2006 (liquidation value  $34,500,000 as of June 30, 2007) |       | 7                 |       | 7 |   |
| Common stock,  $0.01 par value per share                                                                                                                                                                                                                                                                                                           |       |              |       |   |   |
| Authorized,  98,500,000 shares as of June 30, 2007 and December 31, 2006; issued and  outstanding 46,175,374 shares as of June 30, 2007 and 38,090,593 as of  December 31, 2006                                                                                                                                                               |       | 462               |       | 381 |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                                                        |       | 358,188           |       | 339,224 |   |
| Deferred stock-based  compensation                                                                                                                                                                                                                                                                                                                 |       | —            |       | (22 | ) |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                |       | (308,308          | )          | (281,141 | ) |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                   |       | 50,349            |       | 58,449 |   |
| TOTAL                                                                                                                                                                                                                                                                                                                                              |       | $                 | 82,795     |   | $ | 94,822 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

3

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**ACUSPHERE, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(unaudited,in thousands)**
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| REVENUE                                                     |       | $                                | 667        |                           | $          | 246 |   | $ | 1,333 |   | $ | 1,103 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| OPERATING EXPENSES:                                         |       |                             |       |                           |       |   |   |   |   |
| Research and  development                                   |       | 10,854                           |       | 21,640                         |       | 20,842 |   | 32,514 |   |
| General and  administrative                                 |       | 3,357                            |       | 3,040                          |       | 6,577 |   | 5,594 |   |
| Total operating  expenses                                   |       | 14,211                           |       | 24,680                         |       | 27,419 |   | 38,108 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Interest income                                             |       | 561                              |       | 757                            |       | 1,282 |   | 1,234 |   |
| Loss on extinguishment  of debt                             |       | (1,146                           | )          | —                         |       | (1,146 | ) | — |   |
| Interest expense                                            |       | (564                             | )          | (655                           | )          | (1,098 | ) | (1,134 | ) |
| Change in valuation of  derivative                          |       | 41                               |       | 1,455                          |       | (119 | ) | 575 |   |
| NET LOSS                                                    |       | $                                | (14,652    | )                              | $          | (22,877 | ) | $ | (27,167 | ) | $ | (36,330 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Dividends on preferred  stock                               |       | (561                             | )          | (593                           | )          | (1,154 | ) | (1,194 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| NET LOSS AVAILABLE TO  COMMON STOCKHOLDERS                  |       | $                                | (15,213    | )                              | $          | (23,470 | ) | $ | (28,321 | ) | $ | (37,524 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| NET LOSS AVAILABLE TO  COMMON STOCKHOLDERS PER SHARE – |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted                                           |       | $                                | (0.38      | )                              | $          | (0.84 | ) | $ | (0.73 | ) | $ | (1.47 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| WEIGHTED-AVERAGE SHARES  OUTSTANDING –                 |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted                                           |       | 39,908                           |       | 28,055                         |       | 39,010 |   | 25,447 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

4

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**ACUSPHERE, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** |
| ** **                                                                   | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |       |                           |       |   |   |
| Net loss                                                                     |       | $                              | (27,167    | ) | $ | (36,330 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                           |       |   |   |
| Stock-based  compensation expense                                            |       | 1,293                          |       | 1,355 |   |
| Depreciation and  amortization                                               |       | 5,056                          |       | 5,134 |   |
| Loss on disposal of  property and equipment                                  |       | 11                             |       | — |   |
| Write-off of  intellectual property acquisition cost                         |       | —                         |       | 1,492 |   |
| Loss on extinguishment  of debt                                              |       | 1,146                          |       | — |   |
| Noncash interest  expense                                                    |       | 459                            |       | 576 |   |
| Noncash rent expense                                                         |       | 27                             |       | 41 |   |
| Noncash amortization of  deferred revenue                                    |       | (1,333                         | )          | (857 | ) |
| Noncash amortization of  fee and warrants to financial advisor               |       | 109                            |       | 78 |   |
| Noncash change in  valuation of derivative                                   |       | 119                            |       | (576 | ) |
| Changes in operating  assets and liabilities:                                |       |                           |       |   |   |
| Deferred revenue                                                             |       | —                         |       | 1,740 |   |
| Other current assets                                                         |       | (166                           | )          | 54 |   |
| Accounts payable                                                             |       | (775                           | )          | (1,063 | ) |
| Accrued expenses                                                             |       | 1,053                          |       | (1,666 | ) |
| Net cash used in  operating activities                                       |       | (20,168                        | )          | (30,022 | ) |
|                                                                         |       |                           |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                           |       |   |   |
| Purchases of property  and equipment                                         |       | (414                           | )          | (920 | ) |
| Increase in other  assets                                                    |       | (8                             | )          | (95 | ) |
| Net cash used in  investing activities                                       |       | (422                           | )          | (1,015 | ) |
|                                                                         |       |                           |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                           |       |   |   |
| Payments on long-term  obligations                                           |       | (5,538                         | )          | (2,005 | ) |
| Proceeds from long-term  obligations                                         |       | 901                            |       | 2,918 |   |
| Net proceeds from sale  of stock                                             |       | 18,698                         |       | 37,689 |   |
| Payment of preferred  stock dividends                                        |       | (1,154                         | )          | (1,194 | ) |
| Proceeds from exercise  of stock options                                     |       | 38                             |       | 114 |   |
| Proceeds from issuance  of common stock from employee stock purchase plan    |       | 28                             |       | 28 |   |
| Net cash provided by  financing activities                                   |       | 12,973                         |       | 37,550 |   |
|                                                                         |       |                           |       |   |   |
| NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS                        |       | (7,617                         | )          | 6,513 |   |
|                                                                         |       |                           |       |   |   |
| CASH AND CASH  EQUIVALENTS, Beginning of period                              |       | 59,750                         |       | 51,112 |   |
| CASH AND CASH EQUIVALENTS, End of period                                     |       | $                              | 52,133     |   | $ | 57,625 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

5

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**ACUSPHERE,INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1.  Basisof Presentation**

The accompanying unaudited consolidated financialstatements of Acusphere, Inc. and Subsidiaries (the “Company”), have beenprepared in accordance with generally accepted accounting principles in theUnited States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles in the United States of America for completefinancial statements. These statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’slatest audited annual financial statements. Those audited statements areincluded in our Annual Report on Form 10-K for the year ended December 31,2006, which has been filed with the SEC.

In the opinion of management, all adjustments,consisting only of normal, recurring adjustments considered necessary for afair presentation of the results of these interim periods have been included.The results of operations for the three and six months ended June 30, 2007 maynot be indicative of the results that may be expected for the full fiscal year.

The Company is subject to a number of risks similar tothose of pre-commercial stage companies, including dependence on keyindividuals, uncertainty of product development and generation of revenues,dependence on outside sources of capital, risks associated with clinicaltrials, dependence on third party collaborators for research operations, needfor regulatory approval of products, successful protection of intellectualproperty, and competition with larger, better-capitalized companies.  Successful completion of the Company’sdevelopment program and, ultimately, the attainment of profitable operations isdependent on future events, including obtaining adequate financing to fulfillits development activities and achieving a level of revenues adequate tosupport the Company’s cost structure. There are no assurances, however, that the Company will be able toobtain additional financing on favorable terms, or at all, or successfullymarket its products. See Item IA of Part II of this Quarterly Registration Form10-Q “Risk Factors.”

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof expenses during the reporting period. Actual results could differ from thoseestimates or assumptions. The more significant estimates reflected in thesefinancial statements relate to revenue recognition, accrued expenses, embeddedderivatives, and valuation of stock-based compensation.

**2.  Revenue Recognition**

The Company recognizesrevenue from license arrangements in accordance with Staff Accounting BulletinNo. 104, Revenue Recognition (“SAB 104”) and Financial Accounting StandardsBoard (“FASB”) Emerging Issue Task Force Issue No. 00-21, Accounting forRevenue Arrangements with Multiple Deliverables (“EITF 00-21”). The Companyrecognizes revenue from license payments not tied to achieving a specificperformance milestone ratably over the period over which the Company isobligated to perform services. The period over which the Company is obligatedto perform services is estimated based on available facts andcircumstances.  The Company periodicallyevaluates the assumptions underlying these estimates; significant changes inthese assumptions could result in an adjustment to the period over which therevenue is recognized. The Company recognizes revenue from performancepayments, when such performance is substantially in the Company’s control andwhen the Company believes that completion of such performance is reasonablyprobable, ratably over the period over which the Company estimates that it willperform such performance obligations. Substantive at-risk milestone payments,which are based on achieving a specific performance milestone when performanceof such milestone is contingent on performance by others or for whichachievement can not be reasonably estimated or assured, are recognized asrevenue when the milestone is achieved and the related payment is due, providedthat there is no substantial future service obligation associated with themilestone. Revenue in connection with license arrangements is recognized overthe term of the arrangement and is limited to payments collected or due andreasonably assured of collection. In circumstances where the arrangementincludes a refund provision, the Company defers revenue recognition until therefund condition is no longer applicable unless, in the Company’s judgment, therefund circumstances are within its operating control and unlikely tooccur.  Payments received in advance ofbeing recognized as revenue are deferred. Contract amounts which are not due until the customer accepts orverifies the research results are not recognized as revenue until customeracceptance, assuming collectibility is reasonably assured.

6

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**3.  Accountingfor Stock-based Compensation**

***Summary ofStock-Based Compensation Plans***

In June 2005, the2005 Stock Option and Incentive Plan (the “2005 Plan”) was approved. The 2005Plan became effective on June 16, 2005 and provided for a maximum of 1.7million shares of common stock to be issued as incentive stock options (“ISO’s”),nonqualified stock options, awards of common stock and direct purchases ofcommon stock by Acusphere employees, officers, directors and consultants. InJune 2007, the 2005 Plan was amended and the number of shares available underthe Amended and Restated 2005 Stock Option and Incentive Plan (the “Amended2005 Plan”) was increased by 5.0 million shares, to a maximum of 6.7 millionshares.  The maximum number of sharesthat may be granted to any employee under the Amended 2005 Plan shall notexceed 1.0 million shares of common stock during any calendar year. Optionsgranted have a term of 10 years and generally vest over four years. TheCompany settles employee stock option exercises with newly issued shares.  As of June 30, 2007, there were 1.7 millionoptions outstanding under the Amended 2005 Plan, and 5.0 million sharesavailable for future stock and option grants.

In July 2003, the2003 Stock Option and Incentive Plan (the “2003 Plan”) was approved. The 2003Plan became effective on the closing of the Company’s IPO on October 14,2003 and provides that a maximum of 2.5 million shares of common stock may beissued as ISO’s, nonqualified stock option, awards of common stock and directpurchases of common stock by Acusphere employees, officers, directors andconsultants. The maximum number of shares that may be granted to any employeeunder the 2003 Plan shall not exceed 583,334 shares of common stock during anycalendar year. Options granted have a term of 10 years and generally vestover four years. The Company settles employee stock option exercises with newlyissued shares. As of June 30, 2007, there were 2.2 million options outstandingunder the 2003 Plan and 0.3 million shares available for future stock andoptions grants.

In July 2003, the2003 Employee Stock Purchase Plan (the “Purchase Plan”) was approved whichbecame effective on the closing of the Company’s IPO on October 14, 2003.The Purchase Plan provides for the issuance of a maximum of 233,334 shares ofcommon stock. Eligible employee may contribute up to 10% of their total cashcompensation with a maximum of 417 shares semi-annually. The first sale ofshares under this plan occurred on February 29, 2004. During the firstquarter of 2007, 12,234 shares of common stock were sold to employees underthis plan. Acusphere had 194,951 shares available for future sales ofcommon stock under this plan at June 30, 2007.

In March 1994, the1994 Stock Plan (the “1994 Plan”) was approved. The 1994 Plan, as amended,provided that a maximum of 1,423,663 shares of common stock could be issued asISOs, nonqualified stock options and stock grants. The Company ceased grantingawards under the 1994 Plan after March 7, 2004. As of June 30, 2007, therewere 0.9 million options outstanding under the 1994 Plan.

Under the fair valuerecognition provisions of SFAS 123R, stock-based compensation cost is measuredat the grant date based on the fair value of the award and is recognized asexpense over the service period, which generally represents the vesting period.The grant date fair value of stock options is calculated using theBlack-Scholes option-pricing model and the grant date fair value of restrictedstock is based on intrinsic value. The expense recognized over the serviceperiod is required to include an estimate of the awards that will be forfeited.

All stock-based awards tonon-employees are accounted for at their fair market value in accordance withSFAS 123R and Emerging Issues Task Force No. 96-18, *Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services*. Under thismethod, the equity-based instrument was valued at either the fair value of theconsideration received or the equity instrument issued on the date of grant.The resulting compensation cost was recognized and charged to operations overthe service period, which was usually the vesting period.

Stock compensationexpense under SFAS 123R for the three and six months ended June 30, 2007 and2006 is as follows (in millions):
|                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research &  development   |       | $                                                   | 0.3        |                                              | $          | 0.3 |   | $ | 0.6 |   | $ | 0.6 |   |
| General &  administrative |       | 0.3                                                 |       | 0.4                                               |       | 0.6 |   | 0.8 |   |
| Total                         |       | $                                                   | 0.6        |                                              | $          | 0.7 |   | $ | 1.2 |   | $ | 1.4 |   |

 

7

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In accordance withSFAS 123R, the Company will report any excess tax benefits from theexercise of non-qualified stock options as financing cash flows.  There were no excess tax benefits recordedfrom the exercise of non-qualified stock options for the six months ended June30, 2007.

For purposes of recordingstock option-based compensation expense as required by SFAS 123R, the fairvalues of each stock option granted under the Company’s stock option plan forthe three and six months ended June 30, 2007 were estimated as of the date ofgrant using the Black-Scholes option-pricing model. The weighted average fairvalue of all stock option grants issued for the three month periods ended June30, 2007 and 2006 were $1.32 and $1.83, respectively, and for the six monthperiods ended June 30, 2007 and 2006 were $1.29 and $2.25, respectively.

For purposes of recordingPurchase Plan compensation expense as required by SFAS 123R, the fairvalues of each share subject to purchase under the Purchase Plan was estimatedas of the beginning of the subscription period using the Black-Scholesoption-pricing model.

The fair values of allstock option grants issued were determined using the following weighted averageassumptions:
|                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                     |       |                                                |       |                                              |       |   |   |   |   |
| Risk-free interest rate                  |       | 4.95                                                | %          | 4.94                                              | %          | 4.79 | % | 4.62 | % |
| Expected volatility of  underlying stock |       | 53.18                                               | %          | 46.26                                             | %          | 50.77 | % | 38.03 | % |
| Expected life of  option grants (years)  |       | 5.0                                                 |       | 5.0                                               |       | 5.0 |   | 5.0 |   |

 

The fair values ofoptions granted during six-month subscription period ended February 28, 2007and 2006 under the Company’s Purchase Plan were calculated using the followingweighted-average assumptions:
|                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Risk-free interest rate                 |       | 5.1      | %          | 4.8      | %          |
| Expected volatility of underlying stock |       | 49.8     | %          | 37.0     | %          |
| Expected life of option  (years)        |       | 0.5      |       | 0.5      |       |

 

The risk-free rates forthe stock option plans and the Purchase Plan are the weighted average of theyield rates on 5-year U.S. Treasury notes on the dates of the stock optiongrants and the yield rates on 6-month U.S. Treasury bills at the inceptionof each Purchase Plan subscription period, respectively. The dividend yield ofzero is based on the fact that the Company has never paid cash dividends andhas no present intention to pay cash dividends. The Company used the historicalvolatility of the Company’s market-traded stock for the expected volatilityassumption input to the model.

As share-basedcompensation expense is recognized based on awards ultimately expected to vest,compensation expense is reduced for estimated forfeitures.  SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. Forfeiture rates arecalculated based on actual historical forfeitures.

The expected life ofemployee stock options represents the weighted-average period the stock optionsare estimated to remain outstanding. The expected life of employee stockoptions is, in part, a function of the options’ remaining contractual life andthe extent to which the option is in-the-money (i.e., the average stock priceduring the period is above the strike price of the stock option). The Companyestimates that, based on these variables, options are likely on average to beexercised in approximately 5 years.  Theoption life for options under the Purchase Plan is six months, representing thetime period under which the option may be exercised as defined in the plan.

During the six monthsended June 30, 2007, the Company granted stock options to existing employees,as part of the Company’s performance review process, new employees and Directorsin lieu of cash based compensation. All such options were granted with exerciseprices equal to the current market value of the underlying common stock on thedate of grant. Aggregate stock options granted during 2007 are as follows:

8

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** **
|                                             | ** ** | ** **    | ** ** | ** **         | ** ** | **Weighted Average**

**Exercise Price  Per Share** | ** **     | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------------|------------|-----------------------------------------------------|----------------|------------|------------|
| ** **                                  | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | ** **                                          | ** **     | ** ** |
| ** **                                  | ** ** | **Shares**    | ** ** | **Per Share**      | ** ** | ** **                                          | **Fair Value** | ** ** |
|                                        |       |          |       |               |       |                                                |           |       |       |
| For the three months  ended March 31, 2007: |       | 965,080       |       | $2.45 - $2.70      |       | $                                                   | 2.61           |       | $          | 1,239,645 |   |
| For the three months  ended June 30, 2007:  |       | 299,275       |       | $2.10 - $3.98      |       | $                                                   | 2.58           |       | $          | 395,522 |   |

 

On February 28, 2007, thecompany issued 12,234 shares of its common stock under the Purchase Plan at$2.31 per share, reflecting 85% of the closing stock price.

***Stock Options***

Under the Company’spolicies for granting stock options to employees, employees who receive newstock option grants typically receive these grants in the early part of eachyear in connection with the Company’s annual employee performance andcompensation review process. As a result, the level of stock options granted bythe Company is typically the highest during the first fiscal quarter of eachyear.  The following table summarizes thestock option activity in the equity incentive plans from January 1, 2007through June 30, 2007:

|                                           | ** ** | **Number of  Shares** | ** ** | **Exercise Price  Per Share** | ** **   | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-----------------------------------------|--------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Balance, January  1, 2007                 |       | 3,961,118                  |       | $                                       | 0.84 - 13.02 |                                                   | $          | 5.96                                                |       |                            |       |   |   |
|                                      |       |                       |       |                                    |         |                                                   |       |                                                |       |                            |       |
| Granted                                   |       | 965,080                    |       | 2.45 - 2.70                             |         | 2.61                                                   |       |                                                |       |                            |       |
| Exercised                                 |       | (30,253                    | )          | 0.84 - 1.26                             |         | 1.15                                                   |       |                                                |       |                            |       |
| Canceled                                  |       | (129,454                   | )          | 0.84 - 8.50                             |         | 6.24                                                   |       |                                                |       |                            |       |
| Balance,  March 31, 2007             |       | 4,766,491                  |       | $                                       | 0.84 - 13.02 |                                                   | $          | 5.31                                                |       | 8.0                             |       | $ | 25,290,260 |   |
|                                      |       |                       |       |                                    |         |                                                   |       |                                                |       |                            |       |
| Granted                                   |       | 299,275                    |       | 2.10 - 3.98                             |         | 2.58                                                   |       |                                                |       |                            |       |
| Exercised                                 |       | (2,500                     | )          | 1.26 - 1.26                             |         | 1.26                                                   |       |                                                |       |                            |       |
| Canceled                                  |       | (222,854                   | )          | 0.84 - 13.02                            |         | 4.36                                                   |       |                                                |       |                            |       |
| Balance, June  30, 2007                   |       | 4,840,412                  |       | $                                       | 0.84 - 13.02 |                                                   | $          | 5.18                                                |       | 7.6                             |       | $ | 25,087,452 |   |
|                                      |       |                       |       |                                    |         |                                                   |       |                                                |       |                            |       |
| Vested or  Expected to Vest June 30, 2007 |       | 4,539,689                  |       | $                                       | 0.84 - 13.02 |                                                   | $          | 5.18                                                |       | 7.6                             |       | $ | 23,825,206 |   |
| Exercisable, June 30,  2007               |       | 2,597,884                  |       | $                                       | 0.84 - 13.02 |                                                   | $          | 6.03                                                |       | 6.4                             |       | $ | 15,674,733 |   |

 

The following tablesummarizes information related to the Company’s options at June 30, 2007:
| ** **              | ** ** | ** **         | ** ** | **Outstanding**                              | ** ** | **Weighted** | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|-------------------------|------------|--------------------|------------|----------------------------------------------|------------|--------------|------------|--------------------|------------|--------------|------------|
| ** **              | ** ** | ** **         | ** ** | **Weighted-Average**                         | ** ** | **Average**  | ** ** | **Exercisable**    | ** ** | **Average**  | ** ** |
| ** **              | ** ** | **Number of** | ** ** | **Remaining**                                | ** ** | **Exercise** | ** ** | **Number**         | ** ** | **Exercise** | ** ** |
| **Exercise Price** | ** ** | **Shares**         | ** ** | **Contractual Life (in Yrs)** | ** ** | **Price**    | ** ** | **of Shares** | ** ** | **Price**    | ** ** |
|                    |       |               |       |                                         |       |         |       |               |       |         |       |
| $ 0.00 - 1.30      |       |               | 381,567    |                                         | 4.3        |         | $          | 0.84               |       | 381,567      |       | $ | 0.84 |   |
| 1.31 - 2.60             |       |               | 1,089,904  |                                         | 9.2        |         | 2.47       |               | 145,595    |         | 2.34       |   |
| 2.61 - 3.91             |       |               | 419,149    |                                         | 9.1        |         | 3.27       |               | 189,697    |         | 3.48       |   |
| 3.92 - 5.21             |       |               | 338,411    |                                         | 8.3        |         | 4.69       |               | 177,584    |         | 4.82       |   |
| 5.22 - 6.51             |       |               | 1,577,525  |                                         | 7.7        |         | 5.82       |               | 814,070    |         | 5.85       |   |
| 6.52 - 7.81             |       |               | 275,593    |                                         | 5.8        |         | 6.98       |               | 210,301    |         | 7.10       |   |
| 7.82 - 9.11             |       |               | 265,879    |                                         | 6.7        |         | 8.74       |               | 224,265    |         | 8.75       |   |
| 9.12 - 10.42            |       |               | 209,749    |                                         | 5.1        |         | 9.59       |               | 186,380    |         | 9.59       |   |
| 10.43 - 13.02           |       |               | 282,635    |                                         | 6.0        |         | 13.02      |               | 268,425    |         | 13.02      |   |
|                    |       | 4,840,412          |       | 7.6                                          |       | $            | 5.18       |               | 2,597,884  |         | $          | 6.03 |   |

 

The total cash receivedfrom employees as a result of employee stock option exercises during thesix-month period ended June 30, 2007 was approximately $38,000.

9

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As of June 30, 2007, theaggregate intrinsic value of fully vested and exercisable options was$15.7 million.

As of June 30, 2007,there was $3.9 million of total expected unrecognized compensation costrelated to unvested stock options granted under the Company’s stock-basedcompensation plans. That cost is expected to be recognized over aweighted-average period of 2.86 years.

**4.  NetLoss Per Common Share**

Basic and diluted net loss per common share iscalculated by dividing the net loss available to common stockholders by theweighted-average number of unrestricted common shares outstanding during theperiod. Diluted net loss per common share is the same as basic net loss percommon share, since the effects of potentially dilutive securities areanti-dilutive for all periods presented. As of June 30, 2007 and 2006,anti-dilutive securities, which consist of convertible exchangeable preferredstock, stock options, warrants, and restricted common stock that are notincluded in the diluted net loss per share calculation aggregated 19,686,823and 12,295,611 shares, respectively.

The following table reconciles weighted-average commonshares outstanding to the shares used in the computation of basic and dilutedweighted-average common shares outstanding:
|                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                           | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average  common shares outstanding                          |       | 39,908,133                       |       | 28,055,275                     |       | 39,009,619 |   | 25,447,887 |   |
| Less  weighted-average unvested restricted common shares outstanding |       | —                           |       | (375                           | )          | — |   | (633 | ) |
| Basic and diluted  weighted-average common shares outstanding        |       | 39,908,133                       |       | 28,054,900                     |       | 39,009,619 |   | 25,447,254 |   |

 

**5.  Property and Equipment**

Property and equipment at cost consist of thefollowing (in thousands): 

|                                                  | ** ** | **As of:**             | ** ** | ** **                      | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** | **Estimated  Useful Life** | ** ** |
| Equipment                                        |       | $                           | 22,867     |                            | $          | 22,993 |   | 3 – 5 years |   |
| Furniture and  fixtures                          |       | 438                         |       | 424                             |       | 5 years |   |
| Leasehold  improvements                          |       | 31,180                      |       | 31,030                          |       | Lease term (a) |   |
| Sub-total depreciable assets                     |       | 54,485                      |       | 54,447                          |       |   |   |
| Less:  accumulated depreciation and amortization |       | (26,773                     | )          | (22,054                         | )          |   |   |
| Total depreciable assets, net                    |       | 27,712                      |       | 32,393                          |       |   |   |
| Deposits on  equipment purchases                 |       | 302                         |       | 60                              |       | n/a |   |
| Total property  and equipment                    |       | $                           | 28,014     |                            | $          | 32,453 |   |   |   |

 

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(a) The Company depreciates leasehold improvements and equipment undercapital leases over the lesser of their useful lives or the remainder of theirrespective lease terms.

Leaseholdimprovements primarily represent costs incurred for the build-out of theCompany’s commercial manufacturing facility in Tewksbury, Massachusetts, whichare being depreciated over the remaining initial lease term. Deposits onequipment purchases generally represent progress payments made for long-leadtime capital equipment purchases. Depreciation on leasehold improvements tothis commercial manufacturing facility commenced upon the latter of completionof the improvements or October 2005, at which time the Company received anoccupancy permit and began operating use of the facility.  Included inleasehold improvements at June 30, 2007 and 2006, prior to accumulateddepreciation and amortization, is capitalized interest in the amount of$813,000 related to the construction of the facility.

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**6.  IntellectualProperty**

The Company expensesintellectual property costs incurred in obtaining license rights and patentsrights to technology or products for which technological feasibility has notbeen commercially demonstrated and no alternative future use has been shown toexist.  No amount has been capitalized by the Company relating to thecosts of intellectual property developed or acquired by the Company.

On June 1, 2006, theCompany entered into an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from GE Healthcare (“GE”), a divisionof General Electric Company. In consideration of the non-exclusive license ofthese patents, the Company agreed to pay GE $10.0 million prior to commercialapproval of Imagify, of which $5.0 million was paid in June 2006 and $5.0million was due in June 2007.  Inaddition, the Company agreed to pay GE $5.0 million upon the commercialapproval of Imagify (defined as the first to occur of the approval of a NewDrug Application in the United States or the approval of a MarketingAuthorization Application in Europe) and $5.0 million upon the one yearanniversary of such commercial approval. For accounting purposes the Company has not demonstrated technologicalfeasibility or an alternative future use for these patents.  Therefore, $9.5 million was expensed upon theconsummation of the agreement, representing the initial $5.0 million June 2006payment and the present value of the $5.0 million payment initially due in June2007.  The latter two $5.0 millionpayments are contingent upon achievement of future milestone events and,accordingly, have not been recorded at this time.  Effective May 11, 2007 the Company enteredinto an amendment (the “Amendment”) to the GE patent license agreement. The Amendment provides that, in lieu of this $5.0 million payment due on June1, 2007, the Company agreed to make a series of payments as follows: $1.5million was paid in May 2007 and six consecutive quarterly installments of $0.9million due on the first day of the third month of each calendar quarter,commencing June 1, 2008, for a total amended amount payable, includinginterest, of $7.0 million.  As discussed,$1.5 million was paid to GE in May 2007 and $0.8 million has been included inthe current portion of long-term obligations at June 30, 2007.  As the present value of the revised cashflows exceeds 10% of the original cash flows, the modification of the terms hasbeen accounted for as a debt extinguishment. As a result of the modification,the Company recognized $1.1 million in other expense — extinguishment of debt,during the second quarter of 2007, representing the present value of themodified payment terms.  The differencebetween the present value of the modified liability and the actual cashpayments due, or approximately $0.9 million, will be amortized as interestexpense over the remaining term of the liability using the revised effectiveinterest rate.

On May 11, 2005, theCompany entered into a Patent Transfer Agreement with Bayer Schering Pharma AG(“Schering”) pursuant to which the Company acquired rights, title and interestin certain ultrasound-related patents from Schering. In consideration of thetransfer and assignment of these patents, the Company agreed to pay Schering atotal of $7.0 million of which $1.0 million was paid in May 2005, $3.0million was paid in May 2006, and $3.0 million was due in May 2007.  For accounting purposes the Company has notdemonstrated technological feasibility or an alternative future use for thesepatents and the present value of the initial acquisition cost, $6.2 million intotal, was expensed in May 2005 at the time of acquisition.  Effective April 27, 2007 the Company enteredinto an amendment (the “Amendment”) to the Patent Transfer Agreement.  TheAmendment provides that, in lieu of this final $3.0 million payment due in May2007, the Company agreed to make a series of payments as follows: $1.5 millionwas paid in May 2007; $1.0 million is due in May 2008 and $1.0 million is duein May 2009.  The $1.0 million payment due in May 2008 has been includedin the current portion of long-term obligations at June 30, 2007.  The difference between the present value ofthe modified liability and the actual cash payments due, or $0.5 million, willbe amortized as interest expense over the remaining term of the liability.

**7.  Long-termObligations**

The carrying value oflong-term obligations is as follows:
|                              | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                         |       |                        |       |                            |       |
| Capital lease  obligations   |       | $                           | 80         |                            | $          | 93 |   |
| Notes payable                |       | 12,886                      |       | 14,485                          |       |
| Other long-term  obligations |       | 6,276                       |       | 7,702                           |       |
|                         |       | 19,242                      |       | 22,280                          |       |
| Less current  maturities     |       | (7,230                      | )          | (12,899                         | )          |
| Long-term obligations,  net  |       | $                           | 12,012     |                            | $          | 9,381 |   |

 

***Capital Lease Obligations***

The Company leasescapital equipment through Banc of America Leasing Corporation. The remainingmonthly payments range from $460 to $1,019 with maturities throughJune 2010. Interest rates for the above leases range from 7.3% to 9.4%.Acusphere does not 

11

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have any additionalborrowing availability under these lease arrangements as of June 30, 2007.  At June 30, 2007 and December 31, 2006, thecost and net carrying value of equipment under capital leases amounted toapproximately $80,000 and $93,000.

***Notes Payable***

***Equipment Promissory Notes—*** In 2004and 2005, the Company borrowed an aggregate of $10.5 million under an equipmentfinancing line with General Electric Capital Corporation. As of June 30, 2007,net of repayments, the Company had $6.4million outstanding under the line.  InJanuary 2006, the line was amended and the availability was increased by anadditional $3.5 million and was extended through May 2007.  During the six months ended June 30, 2007,the Company borrowed an additional $0.9 million, no additional amounts may beborrowed under this line. Borrowings are collateralized by the equipmentfinanced, with repayment due in monthly installments over 36 to 48 months, withthe last such repayment scheduled for December 2010.Interest rates on these borrowings were fixed at the time of each borrowing andrange from 8.7% to 10.7%. The loans under this line are subject to accelerationupon certain events of default, including failure to make timely payments ofprincipal and interest.

In 2005 the Companyborrowed an aggregate of $7.0 million under an equipment financing line withOxford Finance Corporation. As of June 30, 2007, net of repayments, the Companyhad $4.3 million outstanding under the line. Borrowings are collateralized bythe equipment financed, with repayment due in monthly installments over 36 to48 months, with the last such repayment scheduled for March 2010. Interestrates on these borrowings were fixed at the time of each borrowing and rangefrom 10.3% to 10.9%. No additional amount may be borrowed under this line.

***Facility Loan Agreement—*** InMarch 2005 the Company borrowed $2.0 million under a loan agreementwith MassDevelopment to help finance certain tenant improvements to itscommercial manufacturing facility in Tewksbury, Massachusetts. The loan issecured by certain improvements made at the facility, interest accrues at 5.0%per annum with retroactive adjustments to 9.0% in the event the Company achievespositive operating cash flow, as defined in the agreement, prior to repaymentof the loan. The repayment of principal and accrued interest coincides with theterm of the Tewksbury lease at the time of the loan, which was five-years,nine-months with options to extend the lease for up to two additional five-yearterms. Accrued principal and interest are being repaid on a monthly basis suchthat the total amount outstanding fully amortize over the balance of the termin equal installments. The loan is subject to acceleration upon certaincustomary events of default, including failure to timely pay principal andinterest. Acusphere began making payments on this loan in May 2007 and as ofJune 30, 2007, has $2.1 million outstanding under the loan, including principaland interest.

The retroactive interestrate adjustment feature of the loan agreement was deemed to be an embeddedderivative instrument requiring separate accounting under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” and was initially valued at$62,000. The discount generated from the valuation of the embedded derivativeis being amortized as interest expense over a term beginning with the loanagreement effective date and ending with the currently expected payment date ofthe retroactive interest. The fair value of the derivative liability isre-measured at each reporting period, with any change in value charged orcredited to interest expense. There was nochange in the estimated fair value of the derivative liability for the sixmonths ended June 30, 2007.

***AmountsDue Under Intellectual Property Agreements***

In connection with theCompany’s Patent Transfer Agreement with Schering, the Company was scheduled tomake a payment to Schering of $3.0 million on May 11, 2007.  On April 27, 2007, the Company amended theterms of the Schering agreement, modifying the payment terms such that $1.5million was paid in May 2007, $1.0 million is due in May 2008 and $1.0 millionis due in May 2009, for a total amount payable, including imputed interest as arate of 11.0%, of $3.5 million.

In connection with theCompany’s License Agreement with GE, the Company was scheduled to make apayment to GE of $5.0 million on June 1, 2007. On May 11, 2007, the Company amended the terms of the GE agreement,modifying the payment terms such that $1.5 million was paid in May 2007 and sixconsecutive quarterly installments of $916,666.66 are due on the first day ofthe third month of each calendar quarter, commencing on June 1, 2008, for atotal amount payable, including imputed interest at a rate of 22.5%, of $7.0million.

As of June 30, 2007, theCompany has included $1.8 million in the current portion of long-termobligations, representing payments due under the GE and Schering agreementswithin the next twelve months.

12

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**8.  DeferredRevenue**

In July 2004, theCompany entered into a collaboration, license and supply agreement with Nycomedin which the Company granted Nycomed rights to develop and market Imagify inEurope.  As of June 30, 2007, Nycomed haspaid $12.0 million in license fees for the Company’s research and developmentefforts, which was being recognized ratably in revenue over the developmentperiod initially estimated at 42 months in July 2004.  Estimation of this development periodinvolves the evaluation of many assumptions and uncertainties inherent in theperformance of a long term development project. The Company regularly evaluates these assumptions and uncertainties andthe estimated development recognition period may change if facts andcircumstances change.  During 2006, the estimated development period wasrevised from 42 months to 54 months. There was no change in the amortization period during the three and sixmonths ended June 30, 2007.  Theremaining $4.0 million of the $12.0million in development payments already received, but yet to be recognized asrevenue, is included in deferred revenue at June 30, 2007 and will berecognized over the remaining estimated development period.

In October 2005 andFebruary 2006, the Company and Nycomed amended the collaboration agreementto accelerate $2.0 million in milestone payments in order to fund certainactivities associated with brand development and qualification of a commercialmanufacturing facility. The $2.0 million in payments received pursuant to theseamendments are considered advances against a future milestone payment for aEuropean regulatory filing, or Marketing Authorization Application (“MAA”).This amount is classified as deferred revenue until the MAA milestone isachieved, provided that the applicable revenue recognition criteria are met.

**9.  IncomeTaxes**

The Company hasestablished a full valuation allowance equal to the amount of its deferred taxasset as the realization of such asset is uncertain. In addition, the Company’seffective income tax rate is zero for all periods presented due to the fullvaluation allowance and lack of other income tax obligations.

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. (FIN)48, “*Accounting for Uncertainty in IncomeTaxes**– An Interpretation of FASB Statement No.109”.* FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance with SFAS109, “*Accounting for Income Taxes*”and prescribes a recognition threshold and measurement attributes for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. Under FIN 48, the impact of an uncertain tax position on the income taxreturn must be recognized at the largest amount that is more-likely-than-not tobe sustained upon examination by the relevant taxing authority. An uncertainincome tax position will not be recognized if it has less than a 50% likelihoodof being sustained.  Additionally, FIN 48provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. FIN 48 is effectivefor fiscal years beginning after December 15, 2006.

The Company is subject totaxation in the U.S. and the Commonwealth of Massachusetts.  In connection with the adoption of theprovisions of FIN 48 on January 1, 2007 the Company reviewed its tax positions.Based upon the reviews of the tax positions, the Company did not identify anymaterial unrecognized tax positions upon the adoption of FIN 48 and thereforethe Company’s adoption of FIN 48 had no cumulative effect on its consolidatedfinancial statements.  There have been nochanges in unrecognized tax benefits as a result of tax positions taken duringthe current period. The Company’s tax years since its inception in 1991 aresubject to examination by the tax authorities.

The Company did not haveany accrued interest or penalties in its statement of financial position at theadoption of FIN 48.  Should the Companyincur interest or penalties related to income taxes those amounts would beincluded in income tax expense.

**10.  Stockholders’Equity**

***Convertible Exchangeable Preferred Stock***

On February 24,2005, the Company issued 900,000 shares of 6.5% convertible exchangeablepreferred stock (the “Preferred Stock”) at $50.00 per share resulting in aggregategross proceeds to the Company of $45.0 million (net proceeds of approximately$41.9 million after deducting underwriting discounts, commissions and offeringexpenses). Each share of Preferred Stock has a liquidation preference of $50.00per share. Dividends on the Preferred Stock are cumulative from the date oforiginal issue at the annual rate of $3.25 per share, payable quarterly on thefirst day of March, June, September, and December. Any dividends must bedeclared by the Company’s board of directors and must come from funds that arelegally available for dividend payments. As of June30, 2007, dividends accumulated on the Preferred Stock totaled $5.9 million, ofwhich $5.8 million have been paid.

13

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In August 2007, theCompany’s board of directors declared a quarterly dividend on the preferredstock for all holders as of August 15, 2007. This dividend, which totaled$0.6 million in the aggregate, will paid on September 1, 2007.

The Preferred Stock isconvertible into the Company’s common stock at any time at the option of theholder at a conversion rate of 7.2886 shares of common stock for each share ofPreferred Stock, based on an initial conversion price of $6.86 per share. Theinitial conversion price is subject to adjustment in certain events, but is notsubject to “price based” anti-dilution adjustment. The Company has reservedapproximately 5.0 million shares of common stock for issuance upon suchconversion.

The Company may elect toautomatically convert some or all of the Preferred Stock into shares of commonstock if the closing price of the Company’s common stock has exceeded $10.30per share (150% of the conversion price) for at least 20 trading days duringany 30-day trading period, ending within five trading days prior to notice ofautomatic conversion. Prior to March 1, 2009, if the Company elects toautomatically convert, or if any holder elects to voluntarily convert, thePreferred Stock, the Company will also make an additional payment (“Make-Whole”payment) equal to the aggregate amount of dividends that would have beenpayable on the Preferred Stock so converted from the original date of issuancethrough and including March 1, 2009, less any dividends already paid onthe Preferred Stock. This additional payment is payable by the Company, at itsoption, in cash, in additional shares of its common stock, or in a combinationof cash and shares of common stock. The Company has reserved a maximum ofapproximately 0.7 million shares of common stock for issuance under thisMake-Whole provision.

In April 2007, onestockholder voluntarily converted 40,000 shares of preferred stock into 291,545shares of the Company’s common stock.  Inconnection with the conversion, the Company issued an additional 43,551 sharesof the Company’s common stock in satisfaction of the required Make-Wholepayment.  Through June 30, 2007, therewere 690,000 shares of Preferred Stock outstanding, and 210,000 shares ofPreferred Stock had been voluntarily converted into 1,530,612 shares of theCompany’s common stock. In connection with such conversions, the Company issuedan additional 347,603 shares of the Company’s common stock in satisfaction ofthe required Make-Whole payment. The fair valueof these Make-Whole payments was approximately $1.7 million, which was chargedagainst the derivative liability.

In accordance with SFASNo. 133, the Company is required to separate and account for as anembedded derivative, the dividend make-whole payment feature of the PreferredStock offering. As an embedded derivative instrument, the dividend make-wholepayment feature must be measured at fair value and reflected as a liability.Changes in the fair value of the outstanding portion of the derivative arerecognized in earnings as unrealized gain or loss on derivative in thestatement of operations. The Company determined the fair value of the dividendmake-whole payment feature to be $3.1 million at February 24, 2005 (thecommitment date). This amount was allocated from the proceeds of the PreferredStock to the derivative liability. At June 30, 2007, the derivative liabilitywas valued at approximately $14,000.

The Company may elect toredeem the Preferred Stock at declining redemption prices on or afterMarch 6, 2009.

The Preferred Stock isexchangeable, in whole but not in part, at the option of the Company on anydividend payment date for the Company’s 6.5% convertible subordinateddebentures (“Debentures”) at the rate of $50 principal amount of Debentures foreach share of Preferred Stock. The Debentures, if issued, will mature 25 yearsafter the Exchange Date and have terms substantially similar to those of thePreferred Stock.

The Preferred Stock hasno maturity date and no voting rights prior to conversion into common stock,except under limited circumstances.

***Common Stock***

On June 15, 2007, theCompany sold 7,694,220 units, each unit consisting of (i) one share of commonstock and (ii) one warrant to purchase 0.4 shares of common stock at anexercise price of $3.10 per share, for a purchase price of $2.60 per unit,resulting in aggregate gross proceeds to the Company of approximately $20.0million (net proceeds of approximately $18.7 million after deductingunderwriting discounts and commissions and estimated offering expenses).  The shares of common stock and warrants wereimmediately separable and were issued separately.  The warrants had a fair value ofapproximately $3.2 million, will be exercisable beginning on December 15,2007 and until June 15, 2012, and have been included in Additional paid incapital at June 30, 2007.

As of June 30, 2007,there were 98.5 million shares of common stock authorized, 46.2 million sharesof common stock outstanding and 25.8 million shares of common stock reservedfor issuances, representing 5.0 million shares reserved for issuance for inconnection with outstanding convertible exchangeable preferred stock, 0.7million shares reserved for issuance in connection with the 

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make-whole paymentsprovisions of the outstanding convertible exchangeable preferred stock, 9.8million shares reserved for issuance in connection with outstanding commonstock warrants, 4.8 million shares reserved for issuance in connection withoutstanding stock options, 5.3 million shares reserved for issuance, inaggregate, in connection with shares available for future stock or optiongrants under the 2003 Stock Option Plan and Amended 2005 Stock Option Plan and0.2 million shares reserved for issuance under the Employee Stock PurchasePlan.

***Equity Line of Credit Arrangement***

OnAugust 31, 2006, the Company entered into what is sometimes termed anequity line of credit arrangement with Azimuth Opportunity Ltd. The arrangementprovides that, upon the terms and subject to the conditions set forth therein,Azimuth is committed to purchase up to $30,000,000 of the Company’s commonstock, or up to a maximum of approximately 5.8 million shares of common stock,whichever occurs first, over the 18-month term of the agreement.  No shares of common stock were issued nor wasany commitment fee paid to Azimuth in connection with the execution anddelivery of the agreement. The Company is not required to sell any shares ofcommon stock under the agreement.

Fromtime to time during the term of the agreement, and at the Company’s solediscretion, the Company may present Azimuth with draw down notices requiringAzimuth to purchase the Company’s common stock at a per share purchase priceequal to the daily volume weighted average price of the common stock, less adiscount ranging from 3.875% to 5.875%. Through June 30, 2007 the Company has not issued any shares under thisagreement.

**11.  Common Stock Warrants**

As of June 30, 2007,warrants to purchase shares of the Company’s common stock, the origination ofwhich were derived in connection with debt and lease financing transactions, thecollaborative agreement with Nycomed and the April 2006, December 2006 and June2007 common stock offerings, were outstanding for an aggregate of 9,817,256shares of common stock at an effective weighted average price of $4.84 pershares as follows:
| Number of | ** ** | **Exercise Price** | ** ** | **Expiration**           | ** ** |
|----------------|------------|-------------------------|------------|--------------------------|------------|
| **Shares**     | ** ** | **Per Share**      | ** ** | **Date**                 | ** ** |
| 5,194          |       | 28.50                   |       | February 21,  2008  |       |
| 3,404          |       | 18.00                   |       | February 28,  2008  |       |
| 450,897        |       | 8.46                    |       | April 11,  2008     |       |
| 684            |       | 14.00                   |       | April 11,  2008     |       |
| 7,540          |       | 8.46                    |       | June 27,  2008      |       |
| 573,105        |       | 8.50                    |       | August 2,  2008     |       |
| 16,212         |       | 19.80                   |       | October 16,  2008   |       |
| 14,934         |       | 19.80                   |       | October 19,  2008   |       |
| 114,895        |       | 8.50                    |       | October 20,  2008   |       |
| 55,732         |       | 6.28                    |       | November 30,  2009  |       |
| 2,688          |       | 19.80                   |       | January 5,  2010    |       |
| 30,844         |       | 28.50                   |       | March 30,  2011     |       |
| 28,138         |       | 28.50                   |       | September 27,  2011 |       |
| 1,731,600      |       | 7.97                    |       | April  12, 2011          |       |
| 3,703,701      |       | 3.11                    |       | December  12, 2011       |       |
| 3,077,688      |       | 3.10                    |       | June  15, 2012           |       |
| 9,817,256      |       | $                       | 4.84       |                     |       |   |
|                |            |                         |            |                          |            |  |

 

**12.  New Accounting Pronouncements**

In September 2006,the FASB issued SFAS (FAS) No. 157, “*FairValue Measurements*,” which is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. The purpose of FAS 157 is to clarify and set forthconsistent rules for defining fair value, establishing a framework formeasuring fair value in generally accepted accounting principles and expandingdisclosures about fair value measurements. FAS 157 applies under otheraccounting pronouncements that require or permit fair value measurements wherethose accounting pronouncements have determined that fair value is the relevantmeasurement attribute. FAS 157 does not require any new fair valuemeasurements, but for some entities the 

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application of FAS157 could change current practice.  TheCompany is currently assessing what impact, if any, the adoption of thisstatement will have on its consolidated financial statements.

In February 2007,the FASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007.  This statement allows the measurement at fairvalue of financial instruments and certain other items that are currently notrequired to be measured at fair value. The objective of FAS 159 is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. The fair value option established by this Statement permits themeasurement of eligible items at fair value at specified election dates, withunrealized gains and losses on the items for which the fair value option hasbeen elected reported in earnings at each subsequent reporting date. TheCompany is currently assessing what impact, if any, the adoption of thisstatement will have on its consolidated financial statements.

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

*Statementscontained herein, including without limitation, “Management’s Discussion andAnalysis of Financial Condition and Results of Operation,” contains certainprojections, estimates and other forward-looking statements. “Forward-lookingstatements,” as that term is defined in the Private Securities LitigationReform Act of 1995, are not historical facts and involve a number of risks anduncertainties. Words herein such as “may,” “will,” “should,” “could,” “would,” “expects,”“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,”“potential,” and similar expressions (as well as other words or expressionsreferencing future events, conditions or circumstances) are intended toidentify forward-looking statements.*

*Forward-lookingstatements include, but are not limited to: our plans to develop and market newproducts and the timing of these development programs, in particular ourestimates of the timing of an New Drug Application (“NDA”) and MarketingAuthorization Application (“MAA”) for Imagify; the timing and likelihood ofregulatory approval of an NDA and MAA for Imagify; the level of clinical andcommercial interest in Imagify; the required size and make-up of a sales forceto effectively launch Imagify; our development of other product candidates; ourability to qualify a commercial manufacturing facility for Imagify; our capitalrequirements and our needs for additional financing; the timing and level offuture expenses, revenues and profitability; our estimates of the size of thepotential markets for our product candidates; our selection and licensing ofproduct candidates; our ability to attract and retain collaborators withacceptable development, regulatory and commercialization expertise; thebenefits to be derived from corporate collaborations, license agreements andother collaborative efforts, including those relating to the development andcommercialization of our product candidates; sources of revenues andanticipated revenues, including contributions from corporate collaborations,license agreements and other collaborative efforts for the development andcommercialization of products; our ability to create an effective direct salesand marketing infrastructure for products we elect to market and sell directly;the rate and degree of market acceptance of our product candidates; the timingand amount of reimbursement for our product candidates; the success and timingof other competing therapies that are or may become available; and themanufacturing capacity for our product candidates.*

*Ouractual results and the timing of certain events may differ materially from theresults discussed, projected, anticipated or indicated in any forward-lookingstatements. Any forward-looking statement should be considered in light offactors discussed in Part II. Item 1A “Risk Factors” and elsewhere in thisreport. We caution readers not to place undue reliance on any suchforward-looking statement, which speak only as of the date they are made. Wedisclaim any obligation, except as specifically required by law and therules of the Securities and Exchange Commission, to publicly update orrevise any such statements to reflect any change in company expectations or inevents, conditions or circumstances on which any such statements may be based,or that may affect the likelihood that actual results will differ from thoseset forth in the forward-looking statements.*

*Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and related notes thereto included elsewhere in thisForm 10-Q.*

**Overview**

We are a specialtypharmaceutical company that develops new drugs and improved formulations ofexisting drugs using our proprietary porous microparticle technology. We arefocused on developing proprietary drugs that can offer significant benefitssuch

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as improved safety andefficacy, increased patient compliance, greater ease of use, expandedindications or reduced cost. Our lead product candidate, ImagifyTM (perflubutane polymer microspheres),is a cardiovascular drug for the detection of coronary artery disease,the leading cause of death in the United States which, we believe, hascompleted the Phase 3 clinical trials necessary for the filing of a NDA.  In May 2007, we announced the results of oursecond Phase 3 pivotal trial for Imagify. We believe that our Imagify clinicalresults support an NDA submission and we are working to submit an NDA forImagify the estimated timing of which is Q4 2007.  We currently plan, subject to regulatoryapprovals, to directly market Imagify in the United States.  In Europe, we have partnered with Nycomed forthe marketing and sale of Imagify. In addition to our progress with Imagify, we have demonstrated that our technology canimprove the formulation of hydrophobic drugs and inhaled asthma drugs.

We believe that Imagify-enhancedcardiac stress ultrasound has the potential to significantly reduce the time,cost and resources needed in the assessment of myocardial perfusion, comparedto nuclear stress testing, without subjecting patients to radiation. Myocardialperfusion is blood flow to the heart muscle, a sensitive marker for coronaryartery disease.  There is no ultrasound contrast agent currently approvedby FDA for use in cardiac ultrasound for myocardial perfusion imaging or forany other indication in conjunction with cardiac stress ultrasound.

We developed Imagify andour other product candidates using our proprietary technology which enables usto control the size and porosity of particles, including nanoparticles andmicroparticles, in a versatile manner, so we can customize the particles toaddress the delivery needs of a variety of drugs. We are focused on creatingporous microparticles that are smaller than red blood cells. Some of thesemicroparticles are nanoparticles which are smaller than 1 micron. Small microparticlesare important for delivering drugs intravenously so that they can pass throughthe body’s smallest blood vessels, for increasing the surface area of a drug sothat the drug will dissolve more rapidly, and for delivering drugs to the lungvia inhalation. Porosity is important for entrapping gases in microparticles,for controlling the release rate of the drug from a microparticle, and fortargeting inhaled drugs to specific regions of the lung.

We have incurredsignificant operating losses to develop our product candidates and weanticipate continuing to incur significant operating losses in the comingyears. In particular, we expect to incur significant additional expenses andexperience other significant capital requirements to seek regulatory approvalfor Imagify, to complete the qualification of a manufacturing facility for theinitial commercial manufacture of Imagify and, subject to regulatory approvals,to launch Imagify. Since our inception, we have funded our operations primarilythrough private and public placements of equity securities, equipment-backedfinancings and other debt financings.

**Imagify Phase 3 Clinical Trials**

We have completed twoPhase 3 pivotal clinical trials for Imagify and we believe that these clinicaltrial results support our plan to submit an NDA seeking approval to market andsell Imagify.  These two pivotal trials,named RAMP-1 and RAMP-2, respectively, were independent multi-center pivotaltrials conducted at clinical sites primarily located in North America and Europe.“RAMP” stands for Real-time Assessment of Myocardial Perfusionwith echocardiography. Data from the Phase 3 pivotal studies are intended forsubmission to U.S., European, and potentially other regulatory authorities.

*Pivotal Trial Design.*RAMP-1 and RAMP-2 were designed to demonstrate that Imagify-enhanced cardiacstress ultrasound is non-inferior to nuclear stress testing. Non-inferiorrefers to a statistical type of trial analysis which is designed to show thatone test is comparable to another test within a certain statistical margin oferror. We believe that if the trial data demonstrates to regulatory authoritiesthat Imagify-enhanced cardiac stress ultrasound is non-inferior to nuclearstress testing and if Imagify receives regulatory approval, thatImagify-enhanced cardiac stress ultrasound will compete with nuclear stresstests based on criteria such as lower costs, faster study time, quickeravailability of results and no exposure to radiation.

Patients enrolled in theRAMP-1 and RAMP-2 trials acted as their own controls. Patients enrolled inthese studies received an Imagify-enhanced cardiac stress ultrasound. All ofthe patients evaluated for efficacy in these trials also received a nuclearstress test. The Imagify-enhanced cardiac stress ultrasound images and thenuclear stress images resulting from these studies were forwarded by theclinical sites to an independent clinical research organization where allinformation about the patients, other than what is shown by the imagesthemselves, was removed. Because all such patient information was removed fromthe images, evaluators of the images are referred to as “blinded readers”. Inthe trials, images produced by Imagify-enhanced stress echo were evaluated byechocardiologists, who we refer to as ultrasound blinded readers. Imagesproduced by nuclear stress tests were evaluated by nuclear cardiologists, whowe refer to as nuclear blinded readers. In these trials, we used expert and highly experienced nuclear readers.In addition, to ensure 

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high quality standardsfor the comparator and truth standards in the trials, we standardized theprotocol for the conduct of the nuclear stress tests and coronary angiographybased on our understanding of best clinical practice and used a leading nuclearimaging contrast agent for enhancement of the nuclear stress images.

In the trials, a truthstandard defined which patients have disease and which patients are normal, andserved as the basis for quantifying the performance of the ultrasound blindedreaders and the performance of the nuclear blinded readers.  Non-inferiority or, superiority whenachieved, was determined by comparing the performance of the ultrasound blindedreader to the nuclear blinded reader.

Non-inferiority ofImagify-enhanced cardiac stress ultrasound relative to nuclear stress wasevaluated in three ways. First,non-inferiority was evaluated in all patients. “Accuracy” is defined asa measure of the percentage of patients in which the test is correctrelative to the truth standard. Accuracywas established in our RAMP-2 statistical analysis plan as the principalprimary endpoint of the pivotal trials and the gating endpoint with respect toour NDA submission. In accordance with the trial design, if the accuracyendpoint was not achieved in the trial, the trial would fail. Provided thatultrasound blinded readers demonstrated that their accuracy was non-inferior tothe results from the nuclear blinded readers, non-inferiority was evaluated intwo subsets of patients, those with disease and those without disease.  “Sensitivity” is defined as a measure of theeffectiveness of the test in assessing the presence of disease in the patientswho have been shown by the truth standard as having coronary artery disease and“specificity” as ameasure of the effectiveness of the test in assessing the absence of disease inthe patients who have been shown by the truth standard to be free of coronaryartery disease. Sensitivity and specificity were the second and third clinicaltrial endpoints; the component primary endpoints. For both ultrasound andnuclear, because sensitivity and specificity are subsets of accuracy, whensensitivity increases and overall accuracy remains unchanged there is acorresponding decrease in specificity. Imaging techniques such as nuclear andultrasound, which provide clinicians with information for their evaluation,involve reader judgment and have historically demonstrated variability betweenreaders with respect to sensitivity and specificity depending upon whether thereaders are aggressive (meaning a tendency to diagnose disease) or conservative(meaning a tendency to diagnose an absence of disease) in evaluating difficultcases. The principal primary endpoint of accuracy is a measure thatincorporates both sensitivity and specificity across all patients in theclinical trials. Accuracy tends to be more objective as it is less susceptibleto conservative and aggressive reader judgment.

Patients enrolled in theRAMP-1 and RAMP-2 clinical trials all were patients suspected of having, orknown to have, coronary artery disease. For inclusion in the RAMP-1 trial, allpatients were previously referred, in accordance with the current practice ofmedicine, for a nuclear stress test.  Forinclusion in the RAMP-2 trial, all patients were previously referred, inaccordance with the current practice of medicine, for a coronaryangiography.  Accordingly andintentionally, overall patients enrolled in RAMP-2 had a higher risk ofcoronary artery disease than patients enrolled in RAMP-1.

*Pivotal Trial ResultsOverview. *There werethree different readers in each of RAMP-1 and RAMP-2 (6 readers in total). Allthree readers demonstrated non-inferiority to nuclear stress with respect tothe principal primary endpoint of accuracy. In the RAMP-1 trial, the trial with the relatively lower risk patientpopulation, the ultrasound blinded readers demonstrated superior specificity (the measure of effectiveness inassessing the absence of disease) compared to nuclear stress. In the RAMP-2trial, the trial with the relatively higher risk patient population, theultrasound blinded readers demonstrated superior sensitivity (the measure of effectiveness inassessing disease) compared to nuclear stress. We demonstrated superiorspecificity in RAMP-1 and superior sensitivity in RAMP-2.  Only one of the three ultrasound blindedreaders demonstrated non-inferiority to nuclear stress for sensitivity inRAMP-1, and only one of the three ultrasound blinded readers demonstrated non-inferiorityto nuclear stress for specificity in RAMP-2. We believe that the missed component primary endpoints in these trialswas due largely to the inherent trade-off between sensitivity and specificitycaused by “aggressive” and “conservative” ultrasound and nuclear readers. Whilethese component primary endpoints were missed, we believe that both trialsdemonstrated that, overall, Imagify-enhanced cardiac stress ultrasound is just as accurate asnuclear stress across all readers. We also believe that because, in addition toachieving the principal primary endpoint in both trials, Imagify-enhancedcardiac stress ultrasound also demonstrated superior results on componentprimary endpoints which we believe were the most important in each of thesetrials (specificity in the lower risk patient population and sensitivity in thehigher risk patient population), this data supports an NDA submission forImagify. We intend to submit our NDA in the fourth quarter of 2007 subject tocompletion of required remaining qualification steps relating to its commercialmanufacturing facility.

*RAMP-1 Trial Results.*  In June 2006, we announced results of RAMP-1.320 patients were enrolled in the RAMP-1 clinical trial. More than 99% of theultrasound images acquired from patients enrolled in the trial were evaluable.  The truth standard in this trial wasangiography, clinical outcome or clinical outcome with the unblinded evaluationof the nuclear stress test. The truth standard was angiography in 42% ofpatients.

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The accuracy andspecificity results for RAMP-1 exceeded the criteria for success, which wasdefined in our statistical analysis plan as the ability of 2 out of 3ultrasound blinded readers to show non-inferiority compared to nuclearstress.  Three of three ultrasoundblinded readers had statistically non-inferior accuracy to the nuclear blindedreader, whose accuracy was 70% (all p values <0.005).   Two of three ultrasound blinded readers hadstatistically superior specificity to the nuclear blinded reader, whosespecificity was 63% (p value for both with respect to non-inferiority<0.001). The sensitivity results missed the criteria for success of thetrial with one of three ultrasound blinded readers having statisticalnon-inferior sensitivity (p=0.002) to the nuclear blinded reader’s sensitivityof 78%. Based upon our review of the safety data from this trial, we believeImagify was well tolerated. Disease prevalence in the RAMP-1 trial was 44%.

The majority of adverseevents, or AEs, reported were mild in intensity, transient, and resolvedwithout residual effects. The most common AEs reported were headache, chestpain, nausea, flushing and dizziness and the majority of these AEs occurredfollowing the administration of the dipyridamole pharmacologic stress agentprior to stress imaging. Serious adverse events, or SAEs, and dosediscontinuation was experienced in four and five of 320 patients, respectively.All SAEs were non-life threatening, transient, and resolved without residualeffects.

*RAMP-2 Trial Results.*  In May 2007, we announced results of RAMP-2.457 patients were enrolled in the RAMP-2 trial. In accordance with the trialdesign, patients who did not have anuclear stress test or whose nuclear stress test was not in accordance with thetrial protocol were evaluated for safety but excluded from the primary efficacyanalysis. The reported efficacy results from the RAMP-2 trial are based on 377patients. 100% of the ultrasound images were evaluable. Coronary angiographywas used in 98% of the patients studied as the truth standard.  A truth standard defines which patients havedisease and which patients are normal, and serves as the basis for quantifyingthe performance of the ultrasound blinded readers and the performance of thenuclear blinded readers.

The accuracy andsensitivity results for RAMP-2 exceeded the criteria for success, which wasdefined in our statistical analysis plan as the ability of 2 out of 3ultrasound blinded readers to show non-inferiority compared to nuclearstress.  Three of the ultrasound blindedreaders had superior sensitivity and non-inferior accuracy to nuclear stress.The median Imagify-enhanced cardiac ultrasound blinded results and mediannuclear stress reader were, respectively, 70% and 67% for accuracy (all pvalues <0.001) and 73% and 61% for sensitivity(all p values <0.020).  The specificity results missed the criteriafor success with one of three ultrasound blinded readers having statisticalnon-inferior specificity to nuclear stress (p = 0.01). The medianImagify-enhanced cardiac ultrasound blinded results and median nuclear stressresults for specificity were, respectively, 66% and 76%. ** **Based upon our review of the safetydata from this trial, we believe Imagify was well tolerated. Disease prevalencein the RAMP-2 trial was 58%.

Themajority of AE’S reported were mild in intensity, transient, and resolvedwithout residual effects.  The most common AEs reported were headache,increased white blood cell count, flushing, nausea, and chest pain. Eachpatient in the trial was subjected to pharmacological stress to assessmyocardial perfusion. The majority of these adverse events occurred followingthe administration of the dipyridamole pharmacologic stress agent. SAEs werereported in six patients. All SAEs were non-life threatening. Seven of the 457patients enrolled discontinued dosing in the clinical trial due to AEs or SAEs.Imagify has now been cumulatively studied in over 1,000 patients with known orsuspected of having coronary artery disease. Based upon the results of thesestudies, the Company believes that Imagify is well tolerated.

Webelieve that experience from RAMP-1 contributed to the higher ultrasoundsensitivity results in RAMP-2.  FollowingRAMP-1, the ultrasound blinded readers from RAMP-2 were trained based on thesefindings.  During this training period,the RAMP-2 readers remained blinded to the RAMP-2 results.

The discussion of our NDAsubmission timing and likelihood of success reflects our current assumptions,based on our knowledge and experience and the guidance of our advisors. We cannot assure you that these timelines will be met, nor can we assure youthat our estimates and assumptions will not change based upon ongoingregulatory feedback or that FDA will accept and approve our NDA oncesubmitted.  We cannot control nor predictthe timing or extent, if any, of FDA approval of Imagify. Nycomed isresponsible for submission of Imagify for approval in Europe. We cannot controlnor predict the timing or extent, if any, of Imagify approval in Europe orelsewhere.

**Imagify Manufacturing Facility Update**

Prior to filing an NDAfor Imagify, we must demonstrate that we can successfully and repeatedlymanufacture Imagify in compliance with current good manufacturing practices, orcGMPs, enforced by FDA and overseas regulatory agencies in the manufacturing 

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facility that we intendto use to produce Imagify at commercial launch. We must successfully demonstrate the manufacture of Imagify inaccordance with European regulatory requirements prior to Nycomed filing an MAAfor Imagify.

In late 2005 we substantiallycompleted the build-out of a 58,000 square foot commercial manufacturingfacility in Tewksbury Massachusetts.  In2006 we completed commissioning of the manufacturing equipment and utilities,produced full commercial scale development batches of Imagify and substantiallycompleted all Installation Qualification, or IQ, and Operational Qualification,or OQ, requirements relating to the equipment and utilities initially neededfor this facility.  We continue to makeprogress on our remaining steps in 2007 to qualification of the manufacturingfacility, which include; aseptic validation, process qualification andcontinued product stability testing. All such qualification activities need tobe completed under cGMPs. Data from the production of Imagify under cGMPs isintended to be part of our NDA submission of Imagify.  Based upon our current plans, we expect tocomplete this qualification phase in time to support a NDA submission in thefourth quarter of 2007.

We believe that ourexisting facilities, assuming the addition of a second lyophilizer that thefacility is designed to support, are adequate to meet our current and initialexpected commercial requirements and that suitable space will be available asneeded.

Although thequalification of the commercial manufacturing facility has completed IQ’s andOQ’s, we cannot assure you that we will not encounter complications in thequalification of operations in this facility which complications could addadditional costs or delay our filing of a NDA for Imagify.

**OperationalActivities Update**

Our current operationalactivities include:

*NDA/MAA*:  We continue to expect to submit an NDA insupport of Imagify in Q4 2007.  Steps weplan to take for submission of the NDA include further analyzing and summarizingthe clinical trial results, qualifying our commercial manufacturing facilityand meeting with FDA to confirm our belief that no additional clinical trialsare necessary.  We intend to submit theNDA in electronic eCTD format so that it can be also be utilized for submissionin Europe.

*Preparations forCommercialization of Imagify*: We plan to continue conductingmarket research and advancing our plans and preparation for the commerciallaunch of Imagify.  Our current plan isfor us to directly market Imagify in the United States, however, we willcontinue to evaluate partnering opportunities and their potential advantagesand disadvantages to us. We also plan to conduct various clinical trialsdesigned to support the commercialization of Imagify.

In Q1 2007, we completedthe ACCESS (**A**cquiring **C**onsensusfor **C**ontrast **E**chocardiography**S**ystem **S**ettings)clinical trial, in which we enrolled 39 patients. Based upon our review of thesafety data from this trial, we believe Imagify was well tolerated.  In this trial we believe we have demonstratedthe compatibility of Imagify with multiple different ultrasound imagingsystems.  This trial was designed toprovide a qualitative understanding of Imagify use in association with commonlyused ultrasound equipment.  As a resultof the trial, we are collaborating with several major instrument manufacturersto ensure the optimization of their systems for use with Imagify.

We plan to evaluate theprognostic value of Imagify, which is the ability to predict, using Imagify, ifthe patient is likely to have a future cardiac event, through a trial calledPACE (**P**rognostic **A**ssessmentof **C**ontrast **E**chocardiography).We have begun enrolling patients in the PACE clinical trial, we expect toenroll a majority of the patients from the RAMP-1 and RAMP-2 clinical trials inthis trial by the end of 2007.  No newadministration of Imagify will be required for PACE, as we will conductfollow-up analysis on patients from the RAMP-1 and RAMP-2 trials.

*Publication of Imagify Results*:We plan to work with the clinical investigators from RAMP-1 and RAMP-2 to havethese trial results published and presented.

*Other Product Development*:We continue to increase our emphasis on pipeline development and expect toannounce a new drug development program in the third quarter of 2007.

Although we are workingtowards the achievement of these operational objectives, there can be noassurance that we will successfully achieve these objectives in a timely orsuccessful manner, or that they will be achieved at all.

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**FinancialOperations Overview**

*Revenue.*   Wehave not generated any revenue from product sales since our inception. SinceJuly 2004, when we entered into our collaboration agreement with Nycomed, themajority of our revenue has been collaboration revenue recognized in connectionwith research and development activities performed under this agreement.  As of June 30, 2007 Nycomed has paid us $12.0million in license fees for our research and development efforts. We arerecognizing this $12.0 million of initial license and research and developmentpayments ratably over a period currently estimated at 54 months.  The length of this research and developmentperiod, which is the period over which we are obligated to perform services, isestimated based on available facts and circumstances.  We periodically evaluate the assumptionsunderlying our estimate and change our estimate when appropriate.

Further in the future, wewill seek to generate revenue from a combination of product sales, up-front ormilestone payments and manufacturing payments in connection with collaborativeor strategic relationships, and royalties resulting from the license of ourproducts and intellectual property.

*Researchand Development Expense.*    Research anddevelopment expense consists of expenses incurred in developing, manufacturingand testing product candidates. These expenses consist primarily of salariesand related expenses for personnel, fees paid to professional service providersin conjunction with independently monitoring our clinical trials and acquiringand evaluating data in conjunction with our clinical trials, costs of materialsused in clinical trials and research and development, depreciation of capitalresources used to develop our products, costs of facilities, the legal costs ofpursuing patent protection on select elements of our intellectual property,costs for intellectual property rights we have acquired or licensed andstock-based compensation. We expense research and development costs, includingpatent related costs, as incurred. We believe that significant investment inproduct development is a competitive necessity and plan to continue theseinvestments in order to realize the potential of our product candidates andproprietary technologies. Development programs for later stage productcandidates, such as Imagify, tend to cost more than earlier stage programs fromour **Hydrophobic Drug Delivery System** (“HDDS”) **and Pulmonary Drug Delivery System** (“PDDS”) due to thelength and the number of patients enrolled in clinical trials for later stageprograms and due to costs of scaling production to commercial scale.

*Generaland Administrative Expense.*    General andadministrative expense consists primarily of salaries and other related costsfor personnel in executive, finance, accounting, information technology,business development and human resource functions. Other costs include facilitycosts not otherwise included in research and development expense, professionalfees for legal and accounting services and stock-based compensation.  In addition, we categorize our marketresearch and other marketing-type costs as general and administrative expensebecause we have not yet obtained approval to market or sell our productcandidates.

*InterestIncome.*   Interest income consists of interestearned on our cash and cash equivalents.

*InterestExpense.*   Interest expense consists primarilyof interest incurred on equipment leases, equipment loans and other financingarrangements.

*Changein Valuation of Derivative.*   The terms of ourFebruary 2005 convertible preferred stock offering and our March 2005Mass Development loan agreement contain features considered to be embeddedderivatives which are recorded at estimated fair value in accordance withStatement of Financial Accounting Standards No. 133, *Accountingfor Derivative Instruments* (SFAS 133). Change in valuation of derivative consists of other income(expense) recognized on the change in fair value of the derivative at the endof each reporting period.  The change inthe value of the embedded derivative related to the preferred stock is affectedby a number of assumptions including the number of preferred sharesoutstanding, the amount of dividends paid and the probability and timing ofconversion into common stock. The derivative liability is reduced for anymake-whole payments made during the period upon conversions of preferred stockto common stock. The change in the value of the derivative related to the loanis affected by the expected timing of future positive net cash flows fromoperations.

*Dividendson Preferred Stock.*   For the six months endedJune 30, 2007 and 2006, dividends on preferred stock consisted of dividendspaid or accumulated on the convertible exchangeable preferred stock which weissued in February 2005. Dividends on preferred stock exclude anymake-whole payments on conversion of preferred stock to common stock. Dividendson our preferred stock are cumulative from the date of original issue at theannual rate of $3.25 per share, payable quarterly on the first day of March,June, September, and December. Any dividend payment must be declared by ourboard of directors and must come from funds that are legally available fordividend payments.

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**Resultsof Operations**

*ThreeMonths Ended June 30, 2007 versus 2006*

*Revenue.*   Inconnection with our collaboration agreement with Nycomed entered into inJuly 2004, Nycomed has paid us $12.0 million in license fees for ourresearch and development efforts. We had previously been recognizing this $12.0million in research and development payments ratably over the estimateddevelopment period of 42 months. Estimation of this development period involves the evaluation of manyassumptions and uncertainties inherent in the performance of a long termdevelopment project.  We regularlyevaluate these assumptions and uncertainties and our estimated developmentrecognition period may change if facts and circumstances change.  Wereevaluated the assumptions underlying the development term and during 2006modified our estimate of the development period over which we are obligated toperform services to 54 months.  Inaccordance with this 54-month amortization period, collaboration revenuerecognized for the three months ended June 30, 2007 was $0.7 millionversus $0 in the prior year period.  Norevenue was recognized for the three months ended June 30, 2006 due to thechange in the estimated development period.

During the three month period ended June 30, 2006 werecognized revenue of approximately $0.2 million related to a feasibility studywith a large pharmaceutical company utilizing our HDDS technology.  Also during the three month period ended June30, 2006 we performed clinical research services on behalf of Nycomed, relatingto Imagify.  We were paid for theseservices on a time and materials basis and recognized approximately $0.1million in revenue during the period.

*Researchand Development Expense*.   Researchand development expense for the three months ended June 30, 2007 was $10.9million, versus $21.6 million in the prior year period, a decrease of $10.7million, or 50%.  The decrease was primarily due to intellectual propertyacquisition costs of $10.1 million incurred in 2006 related to licenseagreements with GE and Bracco. The remaining decrease was primarily due tolower direct costs associated with Imagify, primarily due to lower clinicalcosts as a result of the completion of enrollment in the RAMP-2 clinical trialin June 2006, partially offset by higher spending on new development programs.

The followingtable summarizes the primary components of our research and development expensefor the three months ended June 30, 2007 and 2006 (in thousands):
| ** **                                           | ** ** | **Three months ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
|                                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Direct costs:                                        |       |                             |       |   |   |
| Imagify                                              |       | $                                | 4,951      |   | $ | 6,859 |   |
| HDDS and PDDS                                        |       | 1,219                            |       | 241 |   |
| Other direct costs                                   |       | 1,073                            |       | 864 |   |
| Total direct  costs                                  |       | $                                | 7,243      |   | $ | 7,964 |   |
| Indirect costs:                                      |       |                             |       |   |   |
| Facility rent costs                                  |       | 888                              |       | 852 |   |
| Depreciation                                         |       | 2,475                            |       | 2,497 |   |
| All other indirect costs                             |       | 248                              |       | 190 |   |
| Total indirect  costs                                |       | 3,611                            |       | 3,539 |   |
| Write-off of  intellectual property acquisition cost |       | —                           |       | 10,137 |   |
| Total research and  development expense              |       | $                                | 10,854     |   | $ | 21,640 |   |

 

Research and developmentexpense includes $10.1 million for the three months ended June 30, 2006 for thepatents acquired or licensed under the GE and Bracco intellectual propertyagreements.  We expect overall researchand development expenses in 2007 to be lower than 2006, primarily because we donot anticipate entering into any new agreements to license or acquireadditional intellectual property rights relating to Imagify.

We expect to incur higherexpense for the commercial manufacturing facility for the remainder of 2007versus the prior year due to costs for the ongoing validation of the facilityand its equipment, the purchase of raw materials and laboratory supplies andthe hiring of additional personnel. Research and development costs generally increase as programs progressfrom early stage clinical trials to late stage clinical trials. Our primaryresearch and development programs are as follows:

*Late Stage Clinical DevelopmentProgram**(Imagify).* Our lead product candidate, Imagify, is a cardiovascular drug designedfor the detection of coronary artery disease, and the majority of our directresearch and development expenditures relate to our Imagify program. Directexpense for research and development for Imagify for the three months endedJune 30, 2007 was $5.0 million, versus $6.9 million in the prior yearperiod.  This $1.9 million decreasewas primarily due to lower clinical costs due to the completion of 

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enrollment in RAMP-2 clinical trial in June 2006 andlower material and consulting costs in 2007 versus 2006. Included in Imagifydirect costs for the three months ended June 30, 2007 and 2006 were $2.5 millionand $3.6 million, respectively and lower material and consulting costs, ofcosts relating to manufacturing-related activities and manufacturing facilityqualification.

*Early Stage Development Programs**(HDDS and PDDS).* During 2007, we anticipate the costs of early stage development programsto increase as we increase our focus on development of new productcandidates.  However, because theseprograms are in relatively early stages of development, we anticipate thatcosts related to Imagify will continue to represent our primary research anddevelopment expenditures through 2007.

*OtherCosts.* Other direct******research and development**costs primarily consistof management and preclinical evaluation of other product candidates.

Each of our research anddevelopment programs is subject to risks and uncertainties, including therequirement to seek regulatory approvals, which are outside of our control. Forexample, our clinical trials may be subject to delays or rejections based onour inability to enroll patients at the rate that we expect or our inability toproduce clinical trial material in sufficient quantities and of sufficientquality to meet the schedule for our planned clinical trials. Moreover, theproduct candidates identified in these research and development programs,particularly our early stage programs, must overcome significant technological,manufacturing and marketing challenges before they can be successfullycommercialized. As a result of these risks and uncertainties, we are unable topredict with any certainty the period in which material net cash inflows fromsuch projects could be expected to commence or the completion date of theseprograms. Failure to commercialize these product candidates on a timely basiscould have a material adverse affect on our business, financial condition andresults of operations. We may seek to establish collaborative relationships tohelp us commercialize these product candidates, but there can be no assurancethat we will be successful in doing so.

*Generaland Administrative Expense.*   General andadministrative expense for the three months ended June 30, 2007 was $3.4million, versus $3.0 million in the prior year period, an increase of $0.4million, or 13%.  The increase was primarily due to higher professionalfees in marketing and business development.

The following tablesummarizes the primary components of our general and administrative expense forthe three months ended June 30, 2007 and 2006 (in thousands):
| ** **                                | ** ** | **Three months  Ended June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
|                                           | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| Direct costs                              |       | $                                     | 3,167      |   | $ | 2,862 |   |
| Indirect costs:                           |       |                                  |       |   |   |
| Facility costs                            |       | 135                                   |       | 127 |   |
| Depreciation                              |       | 55                                    |       | 51 |   |
| Total indirect  costs                     |       | 190                                   |       | 178 |   |
| Total general and  administrative expense |       | $                                     | 3,357      |   | $ | 3,040 |   |

 

We anticipate general andadministrative expenses to increase, including increases in expenses formarketing, sales and business development activities as we prepare for thecommercialization of Imagify as well as continue to evaluate opportunities forthe application of our HDDS and PDDS technology and to support other productdevelopment efforts.

*InterestIncome.*   Interest income for the three monthsended June 30, 2007 was $0.6 million, versus $0.8 million in the prior yearperiod, a decrease of $0.2 million, or 25%, partially due to lower average cashbalances during the period.

*InterestExpense.*   Interest expense for the threemonths ended June 30, 2007 was $0.6 million, versus $0.7 million in the prioryear period, a decrease of $0.1 million, or 14%, primarily due to lower averageequipment loan balances during the period as a result of repayments under thecapital equipment lines.

*Loss on Extinguishment of Debt*.The loss on extinguishment of debt for the three months ended June 30, 2007 of$1.1 million represents the difference in the present value of the amendedpayment terms under the intellectual property agreements with Schering and GE.

*Changein Valuation of Derivative.* The derivative is related to the embedded derivative instrument from thedividend make-whole payment feature of the preferred stock offering that closedin February 2005. Income from the change in valuation of derivative forthe three months ended June 30, 2007 was approximately $0.1 million, versus$1.5 million in the prior year period. The derivative 

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liability value isreduced as dividends payments on the preferred stock are made, as well as forany conversions of preferred stock into common stock.

*SixMonths Ended June 30, 2007 and 2006*

*Revenue.*   Asof June 30, 2007, in connection with our collaboration agreement with Nycomed,Nycomed paid us $12.0 million in license fees for our research and developmentefforts. We had previously been recognizing this $12.0 million in research anddevelopment payments ratably over the estimated development period of 42months.  Estimation of this developmentperiod involves the evaluation of many assumptions and uncertainties inherentin the performance of a long term development project.  We regularly evaluate these assumptions anduncertainties and our estimated development recognition period may change iffacts and circumstances change.  We reevaluated the assumptions underlyingthe development term and during 2006 modified our estimate of the developmentperiod over which we are obligated to perform services to 54 months.  In accordance with this 54-month amortizationperiod, collaboration revenue recognized for the six months ended June 30, 2007was $1.3 million versus $0.9 in the prior year period.  Revenue was lower in 2006 versus 2007 due tothe change in the estimated development period during 2006.

During the six month period ended June 30, 2006 werecognized revenue of $0.2 million related to a feasibility study with a largepharmaceutical company utilizing our HDDS technology.  Also during the six month period ended June30, 2006 we performed clinical research services on behalf of Nycomed, relatingto AI-700.  We were paid for theseservices on a time and materials basis and recognized approximately $0.1million in revenue during the period.

*Research and Development Expense.*   Research and development expense forthe six months ended June 30, 2007 decreased $11.7 million, or 36%, to$20.8 million versus $32.5 million in the prior year period.  The decreasewas due primarily to lower intellectual property acquisition costs ($10.1million), lower material costs due to a large material purchase from one vendorin January 2006 and lower expenses associated with our clinical trialspartially offset by higher personnel costs due to increased headcount.

The following tablesummarizes the primary components of our research and development expense forthe six months ended June 30, 2007 and 2006 (in thousands):
| ** **                                           | ** ** | **Six months  ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
|                                                      | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Direct costs:                                        |       |                                |       |   |   |
| Imagify                                              |       | $                                   | 9,666      |   | $ | 12,697 |   |
| HDDS and PDDS                                        |       | 1,875                               |       | 513 |   |
| Other direct costs                                   |       | 2,050                               |       | 1,959 |   |
| Total direct  costs                                  |       | $                                   | 13,591     |   | $ | 15,169 |   |
|                                                 |       |                                |       |   |   |
| Indirect costs:                                      |       |                                |       |   |   |
| Facility rent costs                                  |       | 1,750                               |       | 1,730 |   |
| Depreciation                                         |       | 4,946                               |       | 5,037 |   |
| All other indirect costs                             |       | 555                                 |       | 441 |   |
| Total indirect  costs                                |       | 7,251                               |       | 7,208 |   |
| Write-off of  intellectual property acquisition cost |       | —                              |       | 10,137 |   |
| Total research and  development expense              |       | $                                   | 20,842     |   | $ | 32,514 |   |

 

Research and developmentexpense includes $10.1 million for the six months ended June 30, 2006 for thepatents acquired or licensed under the GE and Bracco intellectual propertyagreements.  We expect overall researchand development expenses in 2007 to be lower than 2006, primarily because we donot anticipate entering into any new agreements to license or acquireadditional intellectual property rights relating to Imagify.

We expect to incur higherexpense for the commercial manufacturing facility for the remainder of 2007versus the prior year due to costs for the ongoing validation of the facilityand its equipment, the purchase of raw materials and laboratory supplies andthe hiring of additional personnel. Research and development costs generally increase as programs progressfrom early stage clinical trials to late stage clinical trials.

Our primary research anddevelopment programs are as follows:

*Late Stage Clinical DevelopmentProgram*.  Our lead product candidate, Imagify, is acardiovascular drug designed for the detection of coronary artery disease, and themajority of our direct research and development expenditures relate to ourImagify program. Direct expense for research and development for Imagify forthe six months ended June 30, 2007 was $9.7 million versus $12.7 millionin the prior year period.  This $3.0 milliondecrease was primarily due to lower clinical costs due to the completion ofenrollment in 

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RAMP-2 clinical trial in June 2006 and lower material andconsulting costs in 2007 versus 2006. Included in Imagify direct costs for thethree months ended June 30, 2007 and 2006 were $4.5 million and $6.7 million,respectively, of costs relating to manufacturing related activities andmanufacturing facility qualification.

*EarlyStage Development Programs*.  During 2007, weanticipate the costs of early stage development programs to increase as weincrease our focus on development of new product candidates.  However, because these programs are inrelatively early stages of development, we anticipate that costs related toImagify will continue to represent our primary research and developmentexpenditures through 2007.

*Generaland Administrative Expense.*   General andadministrative expense for the six months ended June 30, 2007 was $6.6 million,versus $5.6 million in the prior year period, an increase of $1.0 million, or18%.  The increase was primarily due to higher professional services costsin marketing, business development and general and administrative services.

The following tablesummarizes the primary components of our general and administrative expense forthe six months ended June 30, 2007 and 2006 (in thousands):
| ** **                                | ** ** | **Six months  ended June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
|                                           | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Direct costs                              |       | $                                   | 6,206      |   | $ | 5,229 |   |
| Indirect costs:                           |       |                                |       |   |   |
| Facility costs                            |       | 260                                 |       | 268 |   |
| Depreciation                              |       | 111                                 |       | 97 |   |
| Total indirect  costs                     |       | 371                                 |       | 365 |   |
| Total general and  administrative expense |       | $                                   | 6,577      |   | $ | 5,594 |   |

 

We anticipategeneral and administrative expenses to increase, including increases inexpenses for marketing, sales and business development activities as we preparefor the commercialization of Imagify as well as continue to evaluateopportunities for the application of our HDDS and PDDS technology and tosupport other product development efforts.

*InterestIncome.*   Interest income for the six monthsended June 30, 2007 was $1.3 million, versus $1.2 million in the prioryear period, an increase of $0.1 million, or 8%.

*InterestExpense.*   Interest expense for the six monthsended June 30, 2007 and 2006 remained consistent at $1.1 million.

*Loss on Extinguishment of Debt*.The loss on extinguishment of debt for the six months ended June 30, 2007 of$1.1 million represents the difference in the present value of the amendedpayment terms under the intellectual property agreements with Schering and GE.

*Changein Valuation of Derivative.*     Thechange in the valuation of derivative resulted in a loss of $0.1 million duringthe six months ended June 30, 2007 versus income of $0.6 million in the prioryear period.  As of June 30, 2007 andDecember 31, 2006, the derivative liability was valued at approximately $14,000and $59,000, respectively.

**Liquidityand Capital Resources**

Historically, we havefinanced our business through the issuance of equity securities, debt financings,equipment leases and with funds from our collaboration with Nycomed. Ourliquidity requirements have arisen primarily from research and developmentexpenditures, equipment expenditures and payments on outstanding indebtedness.As of June 30, 2007, we had cash and cash equivalents of $52.1 million. Asof June 30, 2007 we owed approximately $0.1 million under capital leasesand $19.2 million from notes payable and other long-term obligations. We alsohad operating lease commitments totaling $14.8 million for rent of ourfacilities.

We believe, based on ouroperating plans, that unless we elect to reduce our current rate of spendingand forego pursuit of milestones on our current schedule, we will within thenext twelve months require significant additional funds, which we may raisethrough public or private sales of equity, or from borrowings, or fromstrategic partners. Our future capital requirements will depend on manyfactors, including the scope and progress made in our research and developmentactivities and the size and timing of creating expanded manufacturingcapabilities. We may also need additional funds for possible future strategicacquisitions of businesses, patent licenses, products or technologiescomplementary to our business. We do not expect to generate significantrevenues from Imagify, other than possible license or milestone payments,unless or until we or current or potential partners submit application for andreceive marketing approval from the applicable regulatory authorities. Allowingour resources to become depleted may make future funding more difficult orexpensive. When additional funds are required or, in advance of suchrequirements, we anticipate that funds will be needed, we may raise such fundsfrom time to time through public or private sales of equity or from borrowingsor from strategic partners or we may delay funding of certain developmentactivities which could delay the filing of our Imagify NDA and thecommercialization of Imagify which would have a materially adverse impact onour growth plans. We are evaluating our funding alternatives, additional equityfinancing may be dilutive to our stockholders; debt financing, if available,may involve significant cash payment obligations and covenants that restrictour ability to operate as a business; and strategic partnerships may result inroyalties or other terms which reduce our economic potential from productsunder development.

During the six monthsended June 30, 2007, operating activities used $20.2 million of cash. Net cashused by operating activities during this period resulted primarily from a netloss of $27.2 million, partially offset by non-cash charges fordepreciation and amortization of $5.1 million, non-cash charges forstock-based compensation of $1.3 million, non-cash charges for debt refinancingof $1.1 million and non-cash interest expense of $0.5 million.

During the six monthsended June 30, 2007, investing activities used $0.4 million in cash, primarilyfor purchases of equipment incurred in connection with our commercialmanufacturing facility for Imagify.

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During the six monthsended June 30, 2007, financing activities provided $13.0 million in cashprimarily due to proceeds from a common stock offering of $18.7 million andborrowings under a capital equipment line of $0.9 million, offset by paymentson long term obligations of $5.5 million and dividend payments on ourconvertible exchangeable preferred stock of $1.2 million.

Based upon our currentplans, we estimate our quarterly cash spending for operating activities will beapproximately $10 to $15 million per quarter for the balance of 2007.  In addition, we anticipate quarterly paymentsof approximately $1.7 million for repayment of debt related to prior equipmentpurchases and the MA Development loan, and quarterly payments of approximately$0.6 million for dividends on outstanding preferred stock. We anticipate thatour capital expenses will not exceed $1.0 million in any quarter for thebalance of 2007, we also anticipate continuing to seek debt financing for suchcapital expenditures. These operating and capital cost estimates include costsin preparation of the commercialization of Imagify and costs to advance otherpotential product candidates. The estimates include costs necessary to supportqualification of our commercial manufacturing facility as needed for an ImagifyNDA submission in the U.S. and a MAA submission in Europe.

In August 2007, ourboard of directors declared a quarterly dividend on the preferred stock for allholders as of August 15, 2007. This dividend, which totals $0.6 million inthe aggregate, will be paid on September 1, 2007.

On June 15, 2007, theCompany sold 7,694,220 units, each unit consisting of (i) one share of commonstock (ii) one warrant to purchase 0.4 shares of common stock at an exerciseprice of $3.10 per share, for a purchase price of $2.60 per unit, resulting inaggregate gross proceeds to the Company of approximately $20.0 million (netproceeds of approximately $18.7 million after deducting underwriting discountsand commissions and estimated offering expenses).  The warrants will be exercisable beginning onDecember 15, 2007 and until June 15, 2012.

On May 11, 2007 weamended our license agreement with GE Healthcare AS, a division of GeneralElectric Company (“GE”). Under the terms of the original agreement dated June1, 2006 we were scheduled to make a payment to GE of $5.0 million on June 1,2007.  The amendment provides that, in lieu of this payment, we will makea series of payments due as follows: $1.5 million was paid in May 2007; and sixconsecutive quarterly installments of $916,666.66 are due on the first day ofthe third month of each calendar quarter, commencing June 1, 2008.   All other terms of the agreement remainunchanged.  Under the agreement we agreedto pay GE $5.0 million upon commercial approval (defined as the first to occurof the approval of a New Drug Application in the United States or the approvalof a Marketing Authorization Application in Europe) of Imagify and $5.0 millionupon the one year anniversary of such commercial approval.  The latter two $5.0 million payments arecontingent upon achievement of future milestone events and, accordingly, havenot been recorded at this time.

On April 27, 2007 weamended our patent transfer agreement with Bayer Schering Pharma AG (“Bayer”).Under the terms of the original agreement dated May 11, 2005 we were scheduledto make a final payment to Bayer of $3.0 million in May 2007.  The amendment provides that, in lieu of thispayment, we will make a series of payments due as follows: $1.5 million waspaid in May 2007, $1.0 million is due in May 2008 and $1.0 million is due inMay 2009.

On each of May 18, 2007,March 28, 2007 and January 5, 2007, we entered into promissory notes withGeneral Electric Capital Corporation (“GE Capital”) each of which totaling inaggregate original principal amount approximately $0.3 million for equipmentalready purchased by us. The promissory notes include annual interest rates of10.55%, 10.41% and 10.60%, respectively, and are payable over 42 consecutivemonths. The promissory notes are secured by the equipment financed pursuant tothe terms of our Master Security Agreement with GE Capital. The promissorynotes are subject to acceleration upon certain customary events of default,including the failure to make timely payments of principal and interest.

Effective June 1,2006, we entered into an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from Bracco International BV, orBracco. In consideration the non-exclusive license of these patents, we agreedto pay Bracco up to a total royalty ofEuros 3.0 million, of which Euros 0.5 million was paid in June 2006. Anadditional Euros 2.5 million is payable upon our achievement of certain definedregulatory milestones.  We also agreed topay a royalty on future Imagify revenue, up to a maximum royalty amount ofEuros 10.0 million, less a portion of the above-referenced milestone payments.Whereas the other obligations are contingent upon the outcome of future events,they have not been recorded at this time.

In 2005 and 2006, weborrowed an aggregate of $7.0 million under an equipment financing line withOxford Finance Corporation. As of June 30, 2007, net of repayments, we had $4.3 millionoutstanding. Borrowings are collateralized by the equipment financed, withrepayment due in monthly installments over 36 to 48 months, with the lastsuch repayment scheduled for March 2010. Interest rates on these borrowingswere fixed at the time of each borrowing and range from 10.3% to 10.9% Loanamounts are subject to acceleration upon certain customary events of default,including failure to make timely payments of principal and interest.

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In March 2005we borrowed $2.0 million under a loan agreement with MassDevelopment tohelp finance certain tenant improvements to our commercial manufacturingfacility in Tewksbury, Massachusetts. The loan is secured by certainimprovements made at the facility, interest accrues at 5.0% per annum withretroactive adjustments to 9.0% in the event we achieve positive operating cashflow, as defined in the agreement, prior to repayment of the loan.  The repayment of principal and accruedinterest coincides with the original term of the Tewksbury lease, which wasfive-years, nine-months with options to extend the lease for up to twoadditional five-year terms. Accrued principal and interest are being repaid ona monthly basis such that the total amount outstanding fully amortize over thebalance of the term in equal installments. The loan is subject to accelerationupon certain customary events of default, including failure to timely payprincipal and interest. We began making payments on this loan in May 2007 andas of June 30, 2007, have $2.1 million outstanding under the loan,including principal and interest.

In February  2005,we issued 900,000 shares of 6.5% convertible exchangeable preferred stock, ourPreferred Stock, at $50.00 per share resulting in net proceeds of approximately$41.9 million after deducting underwriting discounts, commissions and offeringexpenses. Each share of Preferred Stock has a liquidation preference of $50.00per share. Dividends on the Preferred Stock are cumulative from the date of originalissue at the annual rate of $3.25 per share, payable quarterly on the first dayof March, June, September, and December. Any dividends must be declared by ourboard of directors and must come from funds that are legally available fordividend payments.  During 2007, 2006 and 2005, we paid $1.2 million, $2.4and $2.2 million, respectively, in dividends on our Preferred Stock. As of June30, 2007, 690,000 shares of Preferred Stock were outstanding. In August 2007,our board of directors declared a quarterly dividend on the Preferred Stock forall holders as of August 15, 2007. This dividend, which totals $0.6million in aggregate, will be paid on September 1, 2007.

We may elect toautomatically convert some or all of the Preferred Stock into shares of ourcommon stock if the closing price of our common stock has exceeded $10.30 pershare (150% of the conversion price) for at least 20 trading days during any30-day trading period, ending within five trading days prior to notice ofautomatic conversion. Prior to March 1, 2009, if we elect to automaticallyconvert, or if any holder elects to voluntarily convert, the Preferred Stock,we will also make an additional payment, the Make-Whole payment, equal to theaggregate amount of dividends that would have been payable on the PreferredStock so converted from the original date of issuance through and includingMarch 1, 2009, less any dividends already paid on the Preferred Stock.This additional payment is payable by us, at our option, in cash, in additionalshares of its common stock, or in a combination of cash and shares of commonstock.  We have reserved a maximum of approximately 0.7 million shares ofcommon stock for issuance under this Make-Whole provision.

In April 2007, onestockholder voluntarily converted 40,000 shares of preferred stock into 291,545shares of out common stock.  Inconnection with the conversion, we issued an additional 43,551 shares of ourcommon stock in satisfaction of the required Make-Whole payment.  Through June 30, 2007, 210,000 shares ofPreferred Stock have been voluntarily converted into 1,530,612 shares of ourcommon stock. In connection with such conversions, we issued an additional347,603 shares of our common stock in satisfaction of the required Make-Whole payment.

We may elect to redeemthe Preferred Stock at declining redemption prices on or after March 6,2009.  The Preferred Stock is exchangeable, in whole but not in part, atour option on any dividend payment date beginning on the exchange date(March 1, 2006) for our 6.5% convertible subordinated debentures, or Debentures,at the rate of $50 principal amount of Debentures for each share of PreferredStock. The Debentures, if issued, will mature 25 years after the exchange dateand have terms substantially similar to those of the Preferred Stock.

In 2004 and 2005 weborrowed an aggregate of $10.5 million under an equipment financing line withGeneral Electric Capital Corporation. As of June 30, 2007, net of repayments,we had $6.4 million outstanding. In January 2006, the line was amended and theavailability was increased by an additional $3.5 million and was extendedthrough May 2007.  During 2007, weborrowed approximately $0.9 million. Borrowings are collateralized by the equipment financed with repaymentdue in monthly installments over 36 to 48 months, with the last such repaymentscheduled for December 2010.  Interestrates on these borrowings were fixed at the time of each borrowing and rangefrom 8.7% to 10.7%. The loans under this line are subject to acceleration uponcertain customary events of default, including failure to timely pay principaland interest.

In July 2004, weentered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Underthe original terms of this agreement, Nycomed paid us license fees and researchand development payments totaling $12.0 million. The original agreement alsoprovides for Nycomed to pay to us up to $58.0 million in milestonepayments upon achievement of certain regulatory milestones and sales goals.Under the agreement, Nycomed has agreed to pay us to manufacture Imagify forthem and to pay us royalties on Nycomed’s sales of Imagify. InOctober 2005 and February 2006 

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our agreement withNycomed was amended such that Nycomed paid us an aggregate of $2.0 million foractivities associated with creating a brand name for Imagify and to fundcertain activities associated with the qualification of our manufacturingfacility. Payments received pursuant to these amendments are consideredadvances against a future milestone payment for a European regulatory filing,or MAA, and are deducted from the potential $58.0 in milestone payments whichmay be earned under the agreement.

In July 2004, weentered into a lease agreement for 58,000 square feet of commercialmanufacturing space in Tewksbury, Massachusetts. This lease has a five year,nine month term with options to extend the lease for up to two additionalfive-year terms at predetermined rental rates. Initially, we received ninemonths of occupancy free of base rent, followed by base rent of approximately$0.4 million in aggregate for the next twelve months with scheduled annualrental rate increases thereafter.

**ShelfRegistration Statement**

We have on file with theU.S. Securities and Exchange Commission , or SEC, a “universal shelf”registration statement on Form S-3 (Registration No. 333-134263) and a universal shelfregistration statement on Form S-3 (Registration No. 333-123854), whichprovide for the offer, from time to time, of common stock, preferred stock,debt securities and warrants up to an aggregate remaining availability ofapproximately $3.5 million and $27.3 million, respectively, net of financing amountspreviously executed under these registration statements and amounts reservedfor up to $30.0 million in potential financing under the equity line of creditarrangement we entered into in August 2006 with Azimuth Opportunity, Ltd.  The SEC declared the shelf registration statements effective onAugust 18, 2006 and April 15, 2005, respectively.  Subject to market conditions and our capitalneeds, and so long as we are then eligible to use the registration statementsunder SEC rules, we may again seek to use any remaining availability under theshelf registration statements by making an offering of securities covered forsale under the registration statements. In addition, we may amend our shelfregistration statements or file a new shelf registration statement toincrease our potential access to capital. If we elect to raise additionalcapital using a shelf registration statement, we may use the net proceeds fromthe sale of these securities for general corporate purposes, which may includefunding clinical trials, research and development, regulatory activities,acquisitions, including acquisitions of companies, products, intellectualproperty or other technology, repayment or refinancing of existingindebtedness, investments, capital expenditures, repurchase of our capitalstock and for any other purposes that we may specify in any prospectussupplement.

**Equity Line of Credit Arrangement**

In August 2006, weentered into what is sometimes termed an equity line of credit arrangement withAzimuth Opportunity Ltd. The arrangement provides that, upon the terms andsubject to the conditions set forth therein, Azimuth is committed to purchaseup to $30.0 million of our common stock, or up to a maximum of approximately 5.8million shares of common stock, whichever occurs first, over the 18-month termof the agreement. From time to time during the term of the agreement, and atour sole discretion, we may present Azimuth with draw down notices requiringAzimuth to purchase our common stock at a per share purchase price equal to thedaily volume weighted average price of the common stock, less a discountranging from 3.875% to 5.875%, based on the volume weighted average price ofthe common stock.  As a result, ourexisting common stockholders will experience immediate dilution upon thepurchase of any shares of our common stock by Azimuth under thisagreement.  The sale of shares under thisequity line will be dilutive to existing stockholders and may have an adverseeffect on the price of our securities. The arrangement includes provisions 

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under which we may, ifelected, terminate this equity line of credit without financial penalty.  We have not sold any stock under thisagreement through June 30, 2007.

**Off-BalanceSheet Financing Arrangements**

We currently do not haveany special purpose entities or off-balance sheet financing arrangements otherthan operating leases.

**ContractualObligations**

The following tablesummarizes our contractual obligations as of June 30, 2007 and the effectsuch obligations are expected to have on our liquidity and cash flow in futureperiods:

|                                   | ** ** | **Payments due by period (in 000’s)** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | **2010** | ** ** | ** ** | ** ** |
| **Contractual**                   | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **2008 -** | ** ** | **-** | ** ** | **2012 and** | ** ** |
| **obligations**                   | ** ** | **Total**                                                           | ** ** | **2007** | ** ** | **2009** | ** ** | **2011** | ** ** | **beyond** | ** ** |
| Long-Term Debt                    |       | $                                                                   | 14,556     |   | $ | 3,427 |   | $ | 9,271 |   | $ | 883 |   | $ | 975 |   |
| Capital Lease  Obligations        |       | 90                                                                  |       | 16 |   | 65 |   | 9 |   | — |   |
| Operating Lease  Obligations      |       | 14,813                                                              |       | 1,463 |   | 6,265 |   | 5,653 |   | 1,432 |   |
| Purchase  Obligations             |       | 238                                                                 |       | 238 |   | — |   | — |   | — |   |
| Other Long—Term  Liabilities |       | 7,500                                                               |       | — |   | 7,500 |   | — |   | — |   |
| **Total**                         |       | $                                                                   | 37,197     |   | $ | 5,144 |   | $ | 23,101 |   | $ | 6,545 |   | $ | 2,407 |   |

 

Long-TermDebt of $14.6 million includes $7.1 million in principal and interest payableto General Electric Capital Corporation and $4.9 million in principal and interest payable to Oxford FinanceCorporation under equipment loans with payments due in monthlyinstallments over 36 to 48 months, collateralized by the equipmentfinanced.  Also included under Long-TermDebt is $2.6 million in principal and interest due under the MassDevelopmentloan, under which we borrowed $2.0 million to finance improvements to ourcommercial manufacturing facility. Interest accrues under the loan at 5.0% perannum with retroactive adjustments to 9.0% in the event we achieve positiveoperating cash flow, as defined in the agreement, prior to repayment of theloan. The repayment of principal and interest coincides with the term of thefacility lease which had an initial five-year, nine-month term.  Acusphere began making payments on the loanin May 2007. All the loans are subject to acceleration upon certain events ofdefault, including failure to make timely payments of principal and interest.

Capital Lease Obligations as classified pursuant toFASB Statement of Financial Accounting Standards No. 13, “*Accountingfor Leases*” relate to leases for business equipment.  We leased capital equipment through Banc ofAmerica Leasing Corporation. The remaining monthly payments range from $460 to$1,019 with maturities through June 2010.

Our operating leaseobligations of $14.8 million relate primarily to our headquarters andmanufacturing facility leases under which we pay monthly rent. Our Watertown,Massachusetts headquarters lease has an original term of 10 years, which beganin December 2001, and which was extended by six months during 2005. Thelease for our commercial manufacturing space in Tewksbury, Massachusetts has aninitial five year, nine month term, which began in July 2004, with options toextend the lease for up to two additional five-year terms at predeterminedrental rates.

PurchaseObligations include one purchase order to a supplier for material.

Other Long-TermLiabilities of $7.5 million includes: (i) a $1.0 million payment due in May2008 and $1.0 million payment due in May 2009 to Schering pursuant to ouramended intellectual property acquisition agreement and (ii) payments inconnection with our amended License Agreement with GE in the amount of six consecutivequarterly installments of 

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$0.9 million due on thefirst day of the third month of each calendar quarter, commencing June 1,2008.  The $7.5 million amount excludes contingentmilestone and royalty obligations.

**CriticalAccounting Policies and Estimates**

Our discussion andanalysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to revenues, accrued expenses, fair valuation of stock related to stock-basedcompensation and income taxes. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

*Revenue.   *Werecognize revenue from license arrangements in accordance with Staff AccountingBulletin No. 104, *Revenue Recognition*(“SAB 104”) and FASB Emerging Issue Task Force Issue No. 00-21, *Accounting for Revenue Arrangements with Multiple Deliverables*(“EITF 00-21”). We recognize revenue from license payments not tied toachieving a specific performance milestone ratably over the period over whichwe are obligated to perform services. The period over which we are obligated toperform services is estimated based on available facts and circumstances. Werecognize revenue from performance payments, when such performance issubstantially in our control and when we believe that completion of suchperformance is reasonably probable, ratably over the period over which weestimate that we will perform such performance obligations. Substantive at-riskmilestone payments, which are based on achieving a specific performancemilestone when performance of such milestone is contingent on performance byothers or for which achievement can not be reasonably estimated or assured, arerecognized as revenue when the milestone is achieved and the related payment isdue, provided that there is no substantial future service obligation associatedwith the milestone. We do not recognize revenue in connection with licensearrangements until payments are collected or due and reasonably assured ofbeing collected. In addition, we do not recognize revenue in circumstanceswhere the arrangement includes a refund provision until the refund condition isno longer applicable unless, in our judgment, the refund circumstances arewithin our operating control and unlikely to occur. Payments received inadvance of being recognized as revenue are deferred.

In connection withfeasibility studies, contract amounts which are not due until the customeraccepts or verifies the research results are not recognized as revenue untilcustomer acceptance, assuming collectibility is reasonable assured.

We are recognizingcollaboration revenue of $12.0 million associated with the initial license andperformance-based payments under the Nycomed agreement based on an estimatedrecognition period of fifty-four months which is the period over which weestimated that we are obligated to perform services supporting theagreement.  Estimation of thisdevelopment period involves many assumptions, including estimates relating tocompletion of activities for which we are reliant on Nycomed to achieve. Ourestimated development recognition period may change again if facts andcircumstances change. Were the estimated development period to beextended, we may be required to record a reduction in cumulative revenuerecognized in our statement of operations in the period in which the change indevelopment period is determined.

Our agreement with Nycomedhas been modified such that Nycomed has paid us $0.2 million for activitiesassociated with creating a brand name for Imagify and related trademarkactivities and paid us $1.8 million to support the validation of the ourcommercial manufacturing facility for Imagify. These amounts were originallyscheduled to be paid to us upon Nycomed’s filing for regulatory approval ofImagify in Europe. While the amounts are not refundable, we have deferredrecognition of these amounts until after the original regulatory filingmilestone has been achieved. Payments received for current and potential HDDSand PDDS feasibility studies, which are offset by costs incurred for suchstudies, are recognized as revenue over the estimated performance period ofeach such study. A change in these estimates could result in a significantchange to the amount of revenue recognized in future periods. In addition, ifthe Nycomed collaboration agreement is terminated for reasons other thancertain non-performance by us, we would recognize the remainder of the paymentswe have received or otherwise expect to collect over the amortization period atthe time of termination. We will not recognize revenue associated with thepotential additional $56 million in milestone-based payments that may be earnedunder the Nycomed agreement until the underlying regulatory and salesmilestones are achieved.

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*Propertyand Equipment.*   Property and equipment arerecorded at cost and depreciated over their estimated useful lives of three tofive years using the straight-line method. The majority of our equipment isrelated to our ongoing research and development activities, including equipmentwhich, subject to regulatory approvals, we intended to use for commercialmanufacture of Imagify. We consider that this equipment is placed in servicewhen operation of the equipment is started-up and begin depreciating the equipmentat this time. The equipment in our commercial manufacturing facility iscurrently undergoing research and development related activities that result inwear and tear on the equipment including include ongoing calibration andtesting.

Leasehold improvementsand equipment under capital leases are recorded at cost. We depreciateleasehold improvements and equipment under capital leases over the lesser oftheir useful lives or the remainder of their respective lease terms. We begandepreciation of leasehold improvements at our Tewksbury facility inOctober 2005 upon receipt of an occupancy permit and taking occupancy ofthe facility. Our leasehold improvements costs on this facility approximate$30.5 million and are being depreciated ratably over remaining term of ourpresent lease, the initial term of which is scheduled in expire inApril 2010. We believe that the use of the initial term of the lease forthe depreciation period, rather than assuming that the lease term is renewed,is appropriate given the inherent uncertainties with a product such as Imagify,which requires regulatory approvals before it can be marketed.  The RiskFactors included under Section 1A of Part II of this document discuss theuncertainties associated with Imagify.

*AccruedExpenses.*   As part of the process of preparingconsolidated financial statements we are required to estimate accrued expenses.This process involves identifying services which have been performed on ourbehalf and estimating the level of service performed and the associated costincurred for such service as of each balance sheet date in our consolidatedfinancial statements. Examples of estimated expenses for which we accrueinclude professional service fees, such as lawyers and accountants, andcontract service fees such as amounts paid to clinical monitors, datamanagement organizations and investigators in conjunction with clinical trials,and fees paid to consultants used in the qualification of our commercialmanufacturing facility for Imagify. In connection with such service fees, ourestimates are most affected by our understanding of the status and timing ofservices provided relative to the actual levels of services incurred by suchservice providers. The majority of our service providers invoice us monthly inarrears for services performed. In the event that we do not identify certaincosts which have begun to be incurred or we under- or over-estimate the levelof services performed or the costs of such services, our reported expenses forsuch period would be too low or too high. The date on which certain servicescommence, the level of services performed on or before a given date and thecost of such services are often judgmental, but have not varied materially fromactual costs incurred. We make these judgments based upon the facts andcircumstances known to us in accordance with accounting principles generallyaccepted in the United States of America.

*Stock-BasedCompensation and Other Equity Instruments.  * Weaccount for stock-based compensation in accordance with the fair valuerecognition provisions of SFAS 123R, “*Share Based Payment*”.Under SFAS 123R, stock-based compensation cost is measured at the grantdate based on the value of the award and is recognized as expense over theappropriate vesting period. Determining the fair value of stock-based awards atthe grant date requires judgment, including estimating the expected term ofstock options, the expected volatility of our stock and expected dividends. Inaddition, judgment is required in estimating the amount of stock-based awardsthat are expected to be forfeited. If actual results differ significantly fromthese estimates or different key assumptions were used, it could have amaterial effect on our Consolidated Financial Statements. See Note 3 ofthe Notes to the Consolidated Financial Statements for additional informationregarding stock-based compensation expense.

Prior to adopting theprovisions of SFAS 123R, we recorded estimated compensation expense foremployee stock options based upon their intrinsic value on the date of grantpursuant to Accounting Principles Board Opinion 25 (“APB 25”), “*Accounting for Stock Issued to Employees*” and provided therequired pro forma disclosures of SFAS 123. Because we established the exerciseprice based on the fair market value of our stock at the date of grant, thestock options had no intrinsic value upon grant, and therefore no estimatedexpense was recorded for stock option expense prior to adopting SFAS 123R.Conversely, when the exercise price for accounting purposes was below fairvalue of our common stock at the date of grant, a non-cash charge tocompensation expense was recorded ratably over the term of the option vestingperiod in an amount equal to the difference between the value calculated usingthe exercise price and the fair value. We did issue options prior to itsinitial S-1 filing in July 2003 at values less than fair market. Thesegrants resulted in the recording of deferred compensation, all of which wasexpensed as of June 30, 2007.  Stockoptions are not included in the calculation of diluted net loss per commonshare due to the antidilutive effect of the stock options for all periodspresented.

Accounting for equityinstruments granted or sold by us under APB No. 14, APB No. 25, SFAS 123and EITF No. 96-18 requires fair value estimates of the equity instrumentgranted or sold. If our estimates of the fair value of these equity instrumentsare too high or too low, it would have the effect of overstating orunderstating expenses. When equity instruments are granted or sold in exchangefor the receipt of goods or services and the value of those goods or servicescan be readily estimated, we use the value of such goods or services todetermine the fair value of the equity instruments. When equity instruments aregranted or sold in exchange for the receipt 

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of goods or services andthe value of those goods or services can not be readily estimated, as is truein connection with most stock options and warrants granted to employees ornon-employees, we estimated the fair value of the equity instruments based uponconsideration of factors which we deemed to be relevant at the time using cost,market and/or income approaches to such valuations.

The fair values of allstock option grants issued were determined using a Black-Scholes model in whichwe are required to make assumptions for the risk-free interest rate, theexpected volatility of the underlying stock, forfeiture rates and expected lifeof option grants.  The risk-free ratesare the weighted average of the yield rates on 5-year U.S. Treasury noteson the dates of the stock option grants. We used the historical volatility ofour market-traded stock for the expected volatility assumption. Forfeiturerates are calculated based on actual historical forfeitures.  The expected life of employee stock optionsrepresents the weighted-average period the stock options are estimated toremain outstanding. The expected life of employee stock options is, in part, afunction of the options’ remaining contractual life and the extent to which theoption is in-the-money (i.e., the average stock price during the period isabove the strike price of the stock option). We estimate that, based on thesevariables, options are likely on average to be exercised in approximately 5years from the date of grant.

*DerivativeLiabilities.  * The terms of our February 2005convertible preferred stock offering and our March 2005 MassDevelopmentloan agreement contain features considered to be embedded derivatives which arerecorded at estimated fair value in accordance with FAS 133. The estimation ofthis fair value includes various assumptions and estimates, includingassumptions and estimates of risk free interest rates, stock price volatilityand the timing of future preferred stock conversions. Changes in theseestimates and assumptions can increase or decrease the value of this derivativeliability.  The unrealized gain or loss of the derivative financialinstrument is included in our statement of operations. The convertiblepreferred stock terms include a dividend make-whole payment provision, whichhas been initially recorded at its estimated fair value. This derivativeliability is reduced upon conversion of the preferred stock as well asdividends declared by our board of directors, if any. The MassDevelopment loanagreement includes a provision for a retroactive interest rate increase in theevent that we achieve certain defined positive operating cash flows. Theinitial fair value of the MassDevelopment loan derivative is being amortizedover a term beginning with the loan agreement effective date and ending withthe estimated payment date of the retroactive interest. The fair value of bothderivative liabilities are re-measured at each reporting period.

*IncomeTaxes.  * As part of the process of preparing ourconsolidated financial statements we are required to estimate our income taxesin each of the jurisdictions in which we operate. This process involves usestimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatments of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities. Inaddition, as of December 31, 2006, we had federal tax net operating losscarryforwards of $70.8 million, which expire through 2026.  We also have research and development creditcarryforwards of $8.1 million. We have recorded a valuation allowance to fullyoffset against these otherwise recognizable net deferred tax assets due to theuncertainty surrounding the timing of the realization of the tax benefit. Inthe event that we determine in the future that we will be able to realize allor a portion of its net deferred tax benefit, an adjustment to deferred taxvaluation allowance would increase net income in the period in which such adetermination is made. The U.S. Tax Code contains provisions that may limit theutilization of net operating loss carryforwards and credits available to beused in any given year in the event of significant changes in ownershipinterest, as defined.

**RecentlyIssued Accounting Pronouncements**

In September 2006, FASBissued SFAS (FAS) No. 157, “*Fair ValueMeasurements*,” which is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. The purpose of FAS 157 is to clarify and set forthconsistent rules for defining fair value, establishing a framework formeasuring fair value in generally accepted accounting principles and expandingdisclosures about fair value measurements. FAS 157 applies under otheraccounting pronouncements that require or permit fair value measurements wherethose accounting pronouncements have determined that fair value is the relevantmeasurement attribute. FAS 157 does not require any new fair valuemeasurements, but for some entities the application of FAS 157 could changecurrent practice.  We are currentlyassessing what impact, if any, the adoption of this statement will have on ourconsolidated financial statements.

In February 2007,the FASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007.  This statement allows the measurement at fairvalue of financial instruments and certain other items that are currently notrequired to be measured at fair value. The objective of FAS 159 is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.

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The fair value optionestablished by this Statement permits the measurement of eligible items at fairvalue at specified election dates, with unrealized gains and losses on theitems for which the fair value option has been elected reported in earnings ateach subsequent reporting date. We are currently assessing what impact, if any,the adoption of this statement will have on our consolidated financialstatements.

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We have not usedderivative financial instruments for speculative or trading purposes. However,we are exposed to market risk related to changes in interest rates. Our currentpolicy is to maintain an investment portfolio consisting mainly of U.S. moneymarket and government-grade securities, directly or through managed funds, withmaturities of one year or less. Our cash is deposited in and invested throughhighly rated financial institutions in North America. Our cash equivalents aresubject to interest rate risk and will fall in value if market interest ratesincrease. If market interest rates were to increase immediately and uniformlyby 10% from levels at June 30, 2007, we estimate that the fair value of ourinvestment portfolio would decline by an immaterial amount. We currently havethe ability to hold our fixed income investments until maturity, and thereforewe do not expect our operating results or cash flows to be affected to anysignificant degree by the effect of a change in market interest rates on ourinvestments. Our equipment loans and capital leases are not subject to interestrate fluctuations because the interest rates are fixed at the time ofborrowing.

**Effectsof Inflation**

Our assets are primarilymonetary, consisting of cash, cash equivalents and short-term investments.Because of their liquidity, these assets are not directly affected byinflation. We also believe that we have intangible assets in the value of ourtechnology. In accordance with generally accepted accounting principles, wehave not capitalized the value of this intellectual property on ourconsolidated balance sheet. Due to the nature of this intellectual property, webelieve that these intangible assets are not affected by inflation. Because weintend to retain and continue to use our equipment, furniture and fixtures andleasehold improvements, we believe that the incremental inflation related toreplacement costs of such items will not materially affect our operations.However, the rate of inflation affects our expenses, such as those for employeecompensation and contract services, which could increase our level of expensesand the rate at which we use our resources.

**ITEM4. CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

As of the end of theperiod covered by this report, our management, with the participation of ourChief Executive Officer and Principal Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures pursuant toRule 13a-15(b) promulgated under the Securities Exchange Act of 1934,as amended, or the Exchange Act. Based upon that evaluation, our ChiefExecutive Officer and Principal Financial Officer concluded that, as of theevaluation date, our disclosure controls and procedures were effective inensuring that material information required to be disclosed by us in the reportsthat it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms, including ensuring that suchmaterial information is accumulated and communicated to our management,including our Chief Executive Officer and Principal Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

**Changesin Internal Control Over Financial Reporting**

During the period coveredby this report, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II. OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS**

None

**ITEM1A. RISK FACTORS**

**CertainFactors Which May Affect Future Results**

*Ouroperating results and financial condition have varied in the past and may inthe future vary significantly depending on a number of factors. Except for thehistorical information in this report, the matters contained in this reportinclude forward-looking statements that involve risks and uncertainties. Thefollowing factors, among others, could cause actual results to differ materiallyfrom those contained in forward-looking statements made in this report andpresented elsewhere by management from time to time. Such factors, amongothers, may have a material adverse effect upon our business, results ofoperations and financial condition.*

*In Item 1A (“RiskFactors”) of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006, which was filed with the Securities and Exchange Commission on March 16, 2007, we describerisk factors related to the Company.  For convenience, our updated risk factors areincluded below in this Item 1A.  Otherthan the risk factors titled:*

·      *“We have not generated any product revenue to date, have a history ofoperating losses and our capitalized resources are limited,”*

·      ***“****Failure to obtain regulatoryapprovals for our product candidates under development, in particular our leadproduct candidate**Imagify, for which wemissed endpoints in each of our pivotal trials, would have a material adverse effect on ourbusiness,”*

·      *“We may need to enroll morepatients in future clinical trials, and any such additional enrollment wouldrequire additional expenditures, which may be material, and would likely resultin a delay of our submitting an NDA with the FDA for**Imagify,”*

·      *“We have removed our**Imagify manufacturing equipment from the facilities of our third partycontract manufacturer and currently have no facility within which tomanufacture Imagify until the new commercial manufacturing facility is qualified or untilother arrangements are made,” and*

·      *“Our potential producttrade names may not be acceptable to FDA,”*

***t****here have been no material changes in our riskfactors from those disclosed in Part II. Item 1A of our Annual Report on Form10-K for the fiscal year ended December 31, 2006.*

**RisksRelated to Our Company**

***We have not generated any product revenue to date, have ahistory of operating losses and our capital resources are limited.***

We are focused on productdevelopment and we have not generated any revenue from commercial sales of ourproducts to date. We have incurred losses each year of our operations. For thesix months ended June 30, 2007, we had a net loss available to holders ofcommon stock of $28.3 million. AtJune 30, 2007 we had an accumulated deficit of $308.3 million. We expectour research and development, general and administrative and sales andmarketing expenses will increase over the next several years.

We expect to continue toincur losses and capital expenditures for the foreseeable future. We alsoanticipate cash outflow from debt repayment and payment of other obligations,including dividends payable on our outstanding shares of 6.5% convertibleexchangeable preferred stock. We believe, based on our operating plans, thatunless we elect to reduce our current rate of spending and forego pursuit ofmilestones on our current schedule, we will within the next twelve monthsrequire significant additional capital to fund our operations, includingdeveloping products, conducting clinical trials, achieving regulatoryapprovals, qualifying commercial manufacturing space and, subject to regulatoryapproval, commercially launching Imagify, or other product candidates underdevelopment or future product candidates. We may raise this additional capitalthrough public or private sales of equity, or from borrowings, or fromstrategic partners.

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As a result of ourlimited capital resources, we may elect to delay the funding of certaindevelopment activities, including those leading to the submission of our NDAfor Imagify, which would result in a delay in the commercialization of Imagify.Any such delay in the submission of an NDA or commercialization of Imagifywould have a material adverse impact on our business and would likely have amaterial adverse effect on the market price of our common stock. To address ourcapital needs, we may elect to raise funds through public or private sales ofequity or from borrowings or from strategic partners. Additional equityfinancing, if available, may be dilutive to our stockholders; debt financing,if available, may involve significant cash payment obligations and covenantsthat restrict our ability to operate our business; and strategic partnerships,if available, may result in royalties or other terms which reduce our economicpotential from products under development. In addition, third parties mayattempt to acquire us at valuations our board of directors or stockholders maynot find attractive.  If our capitalresources are not sufficient to fund our planned operations for a twelve monthperiod at the time the audit for our 2007 financial results is complete, ourauditor will likely include in its audit report, to be included in our annualreport on Form 10-K, an explanatory paragraph regarding substantial doubtrelating to our ability to continue as a going concern. Any such qualificationof the report of our auditors may have a material adverse effect on our abilityto raise capital and may have a material adverse effect on the market price ofour common stock.

***We need to allocate significant amounts of our availablecapital resources to make payments on our outstanding indebtedness andequipment lease obligations, our patent transfer agreement with ScheringAktiengesellschaft, our patent license agreement with GE and as dividends onour 6.5% convertible exchangeable preferred stock, which in turn could reduceour financial flexibility and ability to fund other activities.***

As of June 30, 2007, wehad approximately $19.3 million in aggregate principal indebtedness outstandingrelated to capital lease obligations, notes payable, and other long-termobligations.****As of August 6, 2007, we hadoutstanding 690,000 shares of our 6.5% convertible exchangeable preferredstock, which shares accrue cumulative cash dividends at the annual rate of$3.25 per share, payable quarterly on the first day of March, June, September,and December. These payments will:

·      reduce the availability ofour capital to fund our clinical trials for Imagify, the qualification of ourcommercial manufacturing space in Tewksbury, Massachusetts and for workingcapital and other general corporate purposes and may require us, in order tomeet these obligations, to delay or reduce expenditures or forego businessopportunities; and

·      potentially impair ourability to obtain additional financing.

To address our capitalneeds, we may elect to raise funds through public or private sales of equity orfrom borrowings or from strategic partners. Additional equity financing, ifavailable, may be dilutive to our stockholders; debt financing, if available, mayinvolve significant cash payment obligations and covenants that restrict ourability to operate as a business; and strategic partnerships, if available, mayresult in royalties or other terms which reduce our economic potential fromproducts under development.

***Failure to obtain regulatory approvals for our productcandidates under development, in particular our lead product candidate******Imagify, for which we missed endpoints in each ofour pivotal trials, would have a material adverse effect on our business.***

We must receiveregulatory approval of each of our product candidates before we cancommercialize or sell that product candidate. The pre-clinical laboratorytesting, formulation development, manufacturing and clinical trials of anyproduct candidates we develop independently or in collaboration with thirdparties, as well as the distribution and marketing of these product candidates,are regulated by numerous federal, state and local governmental authorities inthe United States, principally FDA, and by similar agencies in other countries.The development and regulatory approval process takes many years, requires theexpenditure of substantial resources, is uncertain and subject to delays, andcould thus delay our receipt of revenues, if any, from any of our productcandidates.

The data obtained fromclinical and pre-clinical activities are subject to varying interpretationsthat could delay, limit or prevent regulatory agency approval. In particular,we can not assure you that our planned NDA for Imagify will be accepted by FDAnor can  we assure you that our Imagifyclinical results will successfully address the requirements of FDA sufficientlyfor us to obtain regulatory approval. No product can receive FDA approvalunless human clinical trials show both safety and efficacy for each targetindication in accordance with FDA standards. FDA analysis of results includeboth quantitative and qualitative analysis. In both our RAMP-1 and RAMP-2clinical trial results, we achieved the principal primary endpoint of accuracybut failed to achieve one of the two component primary endpoints in each trial(sensitivity in RAMP-1 and specificity in RAMP-2).  The FDA may look at these trials separatelyrather than in their totality and may not approve Imagify based  upon these missed endpoints. We cannotpredict whether FDA will approve Imagify based upon the available results orwhether FDA will seek additional data as a condition to approval or whetherthey will approve Imagify at all.

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Our RAMP-1 and RAMP-2clinical trial results are based upon our statistical analysis plans for thosetrials. These statistical analysis plans, including calculations of statisticalsignificance, were created based on a variety of factors, including feedbackfrom our discussions with FDA, the input of our regulatory consultants and ourown knowledge and past experience in these and similar matters. We anticipatethat the FDA will evaluate the quality and independence of the manner in whichour Imagify clinical trials were conducted. In recent years, other companiesseeking approval for their contrast agents have encountered difficultiesconvincing FDA that the comparative or truth standards that they used in theirclinical trials met acceptable levels of quality, consistency or other standardsacceptable to the FDA. In such cases, these issues were reported to becontributing factors in the failure of such product candidates to be approved.If the FDA, upon review, has concern about the quality of the manner in whichour RAMP-1 or RAMP-2 trial was conducted, or has concerns about the results ofthe nuclear stress tests or coronary angiography used as a comparator and truthstandard in these trials, this could delay or prevent FDA approval of Imagifybased upon our current trial results. There can be no assurance that FDA willaccept our statistical analysis without modification.  How, when, or if such matters are resolvedmay affect whether Imagify is approved for the indication that we are seeking,the timing of such approval, or whether Imagify is approved at all.   In addition, in conjunction with approvingproducts, it is common for regulatory agencies to impose limits on how suchproducts can be used and marketed.  We anticipate that if and when Imagifyand other product candidates are approved that the initial use and marketing ofthese products may be limited at least until such time as we conduct additionalclinical studies or information otherwise becomes available to address theunderlying reasons for such limitations.

We may encounter delaysor rejections based on changes in regulatory agency policies or personnelduring the period in which we develop a drug or the period required for reviewof any application for regulatory agency approval of a particular compound. Ourcontinuing efforts to comply with these changes could lead to delays orrejections of our clinical trials. We also may encounter delays in the event weare unable to produce clinical trial material in sufficient quantities and ofsufficient quality to meet the schedule for our planned clinical trials. Inaddition, we rely on a number of third parties, such as clinical researchorganizations, to help support the clinical trials by performing independentclinical monitoring, data acquisition and data evaluations. Any failure on thepart of these third parties could delay the regulatory approval process.

Failure to obtainregulatory approval or any delay or setback in obtaining regulatory agencyapprovals could:

· adversely affect our ability to market anydrugs we develop independently or with collaborative partners;

· impose additional costs and diminish anycompetitive advantages that we may attain; or

· adverselyaffect our ability to generate royalties.

Failure to obtainapproval for our lead product candidate, Imagify, or delay in such approval,would delay our receipt of product revenues and would have a material adverseaffect our business, financial condition and results of operations.  Our stock price would also be materially adverselyaffected.

***Adverseevents are likely to be encountered in our clinical trials and these eventscould delay, limit or prevent regulatory approval.***

Many of the patients inour Imagify clinical trials have coronary artery disease. When we conductfuture Imagify clinical studies, patients will be exposed to potential safetyrisks associated with a stress test, including risks associated with apharmacological stressor, and Imagify. Given the nature of Imagify clinicaltrials, including the cumulative administration of Imagify to larger numbers ofat-risk patients and administering Imagify to patients with coexisting disease,adverse events are expected to be encountered during the clinical trials.Adverse events are also likely to be encountered in clinical trials for ourother products, which clinical trials may also include at-risk patients. Whensignificant adverse events are detected and these events are attributable toour products, such events could delay, limit or prevent regulatory agencyapproval.

***Ourcollaborative partners may not obtain regulatory approvals in other countries,which may have an adverse effect on our business .***

We cannot be certain thatwe or our partners will obtain any regulatory approvals in other countries andthe failure to obtain these approvals would have a material adverse affect onour business, financial condition and results of operations. In order to marketour products outside of the United States, we and our current, and potentialfuture, collaborative partners must establish and comply with numerous and varyingregulatory requirements of other countries regarding safety and efficacy. Theapproval procedures vary among countries and can involve additional producttesting and additional administrative review periods. The time required toobtain approval in other countries might differ from that required to obtainFDA approval. The regulatory approval process in other countries may includeall of the risks associated with obtaining FDA approval detailed above.Approval by FDA does not ensure approval by the regulatory authorities of othercountries. In addition, many countries outside the United States require aseparate review process prior 

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to marketing to determinewhether their national health insurance schemes will pay for newly approvedproducts, as well as the price which may be charged for a product.

***We may need to enroll more patients in future clinicaltrials, and any such additional enrollment would require additionalexpenditures, which may be material, and would likely result in a delay of oursubmitting an NDA with the FDA for******Imagify.***

If discussions with FDAlead us to conclude that further clinical trials of Imagify are required toachieve NDA approval, such trials may affect the timing of NDA submission orapproval and would incur significant costs. We cannot assure that the performance of additional trials would leadultimately to NDA approval.  Moreover, wecurrently do not possess sufficient inventory of Imagify to conduct any suchtrial, and would need to contract for the manufacture of such material.  We may not be able to obtain sufficientquantity of such material in a timely fashion or on commercially reasonableterms, or at all.  Our inability toconduct additional clinical trials for Imagify in a timely fashion, or at all,resulting from of our inability to manufacture or obtain clinical trialmaterials would have material adverse effect on our business.

***If we cannot raise additional capital on acceptable terms,we may be unable to complete planned clinical trials, obtain regulatory approvalsor commercialize our product candidates.***

We will requiresubstantial future capital in order to continue to conduct the research anddevelopment, clinical and regulatory activities necessary to bring our productcandidates to market and to establish commercial manufacturing, marketing andsales capabilities. Our future capital requirements will depend on manyfactors, including the:

·  progressof pre-clinical development and laboratory testing and clinical trials;

·  timingof construction and size to which we expand our manufacturing capabilities;

·  timeand costs involved in obtaining regulatory approvals;

·  numberof product candidates we pursue;

·  costsinvolved in filing and prosecuting patent applications and enforcing ordefending patent claims; and

·  establishment of selectedstrategic alliances and activities required for product commercialization.

We may seek additionalfunding through strategic collaborations or through private or public sales of our securities or by licensing all ora portion of our technology. This funding may significantly dilute existingstockholders or may limit our rights to our technology.

We cannot assure you thatwe can obtain additional funding on reasonable terms, or at all. If we raiseadditional funds by issuing equity securities, our stock price may decline, ourexisting stockholders may experience significant dilution, and the newly issuedsecurities may have rights superior to those of our common stock. If we raiseadditional funds by issuing debt, we may be subject to limitations on ouroperations and such debt may have rights senior to the debentures, if issued.If we cannot obtain adequate funds, we may:

·  terminateor delay clinical trials for one or more of our product candidates;

·  delayour establishment of sales, marketing and/or manufacturing capabilities;

·  curtailsignificant product development programs that are designed to identify newproduct candidates;

·  relinquishrights to our technologies or product candidates;

·  terminateor delay qualification of our commercial manufacturing facility; and/or

·  terminate or delay developmentof one or more of our product candidates, including Imagify, and discontinueoperations of all or a portion of our operations.

Any of these could have amaterial adverse effect on our business, financial condition and results ofoperations.  Our stock price could alsobe materially adversely affected.

***Our products, if approved, may fail to achieve marketacceptance.***

There can be no assurancethat any products we successfully develop, if approved for marketing, willachieve market acceptance or generate significant revenues. Each of our productcandidates is intended to replace or alter existing therapies or procedures,and hospitals, physicians or patients may conclude that these products are lesssafe or effective or otherwise less attractive than these existing therapies orprocedures. For example, our lead product candidate, Imagify, is acardiovascular drug for use in ultrasound imaging procedures which will competewith existing nuclear imaging and cardiac ultrasound. Hospitals, physicians orpatients may 

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prefer these existingprocedures to Imagify-enhanced cardiac stress ultrasound imaging. If ourproducts do not receive market acceptance for any reason, it would adverselyaffect our business, financial condition and results of operations.  In such event, we may elect to conductadditional clinical trials designed to demonstrate the effectiveness of Imagifyin circumstances not studied in our Phase 3 clinical trials.  Any such studies will likely be expensive andtime consuming. Further, our competitors may develop new technologies orproducts that are more effective or less costly, or that seem morecost-effective, than our products. We can give no assurance that hospitals,physicians, patients or the medical community in general will accept and useany products that we may develop.

***We have never manufactured any of our product candidates incommercial quantities, and if we fail to develop an effective manufacturingcapability for our products, including our lead product candidate******Imagify, we may be unable to commercialize theseproducts.***

We have no experience inmanufacturing our products for commercial use and limited experience indesigning equipment for the manufacture of our products. We are working tostart-up and qualify operations at a commercial manufacturing facility inTewksbury, Massachusetts and to demonstrate that we can produce Imagify at acommercial manufacturing scale prior to our filing of a NDA for Imagify and,subject to required regulatory approvals, we intend to manufacture Imagify inthis facility for commercial use. We can not assure you that we will be able toobtain the necessary regulatory approvals for such commercial manufacture, atall or in a timely or economical manner. Our intention to manufacture Imagifyor other products exposes us to the following risks, any of which could delayor prevent the approval of our products by FDA or corresponding state andforeign agencies, or the commercialization of our products, or result in highercosts or inability to meet demand for Imagify leading to potential revenueloss, and any of which would have a material adverse impact on our business,financial condition and results of operations.

·  Manufacturers are obliged tomanufacture in highly controlled environments and to operate in accordance withFDA and international mandated current good manufacturing practices, or cGMPs.For our clinical trials we have relied on contract manufacturers for suchfacilities and cGMP compliance. Creation and qualification of a commercialmanufacturing environment requires significant expertise and capital resources,including the development of advanced manufacturing techniques and processcontrols and is subject to local and state planning approvals. Manufacturers ofpharmaceutical products often encounter difficulties in constructing andqualifying new manufacturing facilities and in production, especially inscaling-up initial production. A failure to establish and follow cGMPs and todocument adherence to such practices may lead to significant delays in theavailability of material for our NDA filing or commercial production forImagify and may delay or prevent filing or approval of marketing applicationsfor our products or the ability to continue to manufacture the products.Certain of these delays would further require us to continue to operate thisfacility and incur related costs.

·  Manufacture of our productcandidates, in preparation for filing a NDA and for commercial production, willeach initially require and rely on a single commercial manufacturing site,directly or through a contract manufacturer, without the backup of a secondsite that is qualified for commercial manufacture of the product. Qualificationof another manufacturing site can be expensive and time consuming. Prior tousing product from a new manufacturing site, we must demonstrate to FDA andcorresponding state and foreign agencies that the specifications for theproduct are consistent with the specifications for the product as it wasmanufactured at a prior qualified site or we must clinically or otherwisedemonstrate that the safety and efficacy of the product produced in the newmanufacturing site is consistent with the product as it was manufactured at theprior site. Demonstrating such consistency may be difficult, expensive or timeconsuming. In addition, before we would be able to produce product forcommercial use at a new facility, it will have to undergo a pre-approvalinspection by FDA and corresponding state and foreign agencies. Once approved,drug manufacturers are subject to ongoing periodic unannounced inspection byFDA and corresponding state and foreign agencies to ensure strict compliancewith cGMPs, other government regulations and corresponding foreign standards.Failure to maintain compliance with cGMP or with safety or environmentalregulations could result in penalties, product recalls or restrictions on theuse of the manufacturing site.

We have a singlemanufacturing facility. This facility and the manufacturing equipment we use toproduce Imagify would be difficult to replace and could require substantiallead-time to repair or replace in the event of a regulatory, manufacturing,catastrophic event or similar problem. In such event, we would be forced torely on third-party manufacturers and there would likely be substantial delaybefore we would be able to restart production. Although we possess insurancefor damage to our property and the disruption of our business from casualties,such insurance may not be sufficient to cover all of our potential losses,including potential damage to our reputation, and may not continue to beavailable to us on acceptable terms, or at all. In addition, future growth mayoutpace our manufacturing capacity, in which event we would need to locate,obtain and build-out additional space. New or alternative facilities may not beavailable to us on acceptable terms. Even if we are able to identify such newor alternative facilities, we may incur additional costs and we may experiencea disruption in the supply of our products until those facilities areavailable.

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***Failure to manufacture our products in commercial quantitiescould damage our European partnership***

Under the terms of ourcollaboration agreement with Nycomed, we are responsible for the commercialmanufacture of Imagify for marketing and sale by Nycomed in Europe. Failure tomanufacture Imagify in a timely manner or on an economic basis, or insufficient quantities, could jeopardize our relationship with Nycomed. We donot currently have a European sales force, nor do we have experience withregard to the commercialization, marketing, sale or distribution ofpharmaceutical products in Europe, and we rely entirely on Nycomed for thisexpertise. Any termination of our relationship with Nycomed would have amaterial adverse impact on our business, financial condition and results ofoperations.

***We may not be able to manufacture our products in commercialquantities, which would prevent us from marketing our products.***

To date our productcandidates have been manufactured in small quantities for pre-clinical andclinical trials. If any of these product candidates are approved by FDA orforeign regulatory authorities for commercial sale, we will need to manufacturethem in larger quantities. For Imagify, it is our intention to seek regulatoryapproval after we have demonstrated that we can manufacture Imagify at a largerbatch scale than is being used for clinical trial materials. Manufacturersoften encounter difficulties in achieving volume production, quality controland quality assurance. Accordingly, we might not be able to manufacturesufficient quantities of drugs to meet our clinical schedules or tocommercialize our products.  We cannotassure you that we will be able to successfully increase the manufacturingcapacity or manufacture at a larger batch scale, whether on our own or incollaboration with third party manufacturers, for any of our product candidatesin a timely or economic manner, or at all. Significant scale-up ofmanufacturing may require certain additional validation studies, which FDA mustreview and approve. If we are unable to successfully increase the manufacturingcapacity for a product candidate, the regulatory approval or commercial launchof that product candidate may be delayed or there may be a shortage in supplyof that product candidate. Our product candidates require precise, high-qualitymanufacturing. Our failure to achieve and maintain these high manufacturingstandards, including controlling the incidence of manufacturing errors andmaintaining reliable product packaging for diverse environmental conditions,could result in patient injury or death, product recalls or withdrawals, delaysor failures in product testing or delivery, cost overruns or other problemsthat could seriously hurt our business.

Our commercialmanufacturing facility in Tewksbury, Massachusetts is designed to meet ourestimated initial commercial demand for Imagify. The facility is beinginitially equipped to run one production line. In order to support greaterproduction capacity, this production line is designed to support a largerlyophilizer (pharmaceutical freeze dryer which can be operated under sterileconditions) in addition to the one that has been initially installed.Purchasing, installing and qualifying manufacturing equipment, such as alyophilizer, typically requires significant lead times and temporarydiscontinuation of production. Also in the future we may need to add additionalproduction lines at the Tewksbury site or elsewhere to meet potentialcommercial demand for Imagify. We have made no commitment to such additions atthis time. The cost of such additions can be significant. There can be noassurance that our capacity estimates will be achieved. Any such additionswould increase our operating spending, increase our capital requirements andreduce our resources available for development activities.

***We have removed our******Imagify manufacturing equipment from the facilitiesof our third party contract manufacturer and currently have no facility withinwhich to manufacture Imagify until the new commercial manufacturing facility isqualified or until other arrangements are made.***

We have removed ourImagify manufacturing equipment from the facilities of a third-party contractmanufacturer.  Currently, we have nofacility within which to manufacture Imagify until the new commercialmanufacturing facility is qualified or until other arrangements are made. Wehave no existing inventory of Imagify on-hand and would need to produceadditional material for future clinical trials. If we lack sufficient inventoryof Imagify clinical trial material to perform clinical trials or are unable tomanufacture sufficient inventory on a timely basis, our program could beadversely impacted or delayed. These delays could have a material adverseeffect on our business, financial condition and results of operations.

***If third-party manufacturers of our products candidates failto devote sufficient time and resources to our concerns, or if theirperformance is substandard, our clinical trials may be delayed and our costsmay rise.***

We may rely substantiallyon third-party contract manufacturers to supply, store and distribute ourproduct candidates for our clinical trials and other development needs. Ourreliance on these third-party manufacturers will expose us to the followingrisks, any of which could delay or prevent the completion of our clinicaltrials, the approval of our products by FDA, or the commercialization of ourproducts, result in higher costs, or deprive us of additional productcandidates, and any of such effects would have a material adverse impact on ourbusiness, financial condition and results of operations.

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·   Contract manufacturers oftenencounter difficulties in achieving volume production, quality control andquality assurance, as well as shortages of qualified personnel. Accordingly, amanufacturer might not be able to manufacture sufficient quantities of drugs tomeet our clinical schedules.

·   Contract manufacturers areobliged to operate in accordance with FDA-mandated current good manufacturingpractices, or cGMPs. A failure of these contract manufacturers to establish andfollow cGMPs and to document their adherence to such practices may lead tosignificant delays in the availability of material for clinical study and maydelay or prevent filing or approval of marketing applications for our products.

·   For production of clinicaltrial material for each of our current product candidates we will initiallyrely on a single manufacturer. Changing these or future manufacturers may bedifficult and the number of potential manufacturers is limited. Changingmanufacturers may require re-validation of the manufacturing processes andprocedures in accordance with FDA-mandated cGMPs. Such re-validation may becostly and time-consuming. It may be difficult or impossible for us to findreplacement manufacturers on acceptable terms quickly, or at all.

·   Our contract manufacturers maynot perform as agreed or may not remain in the contract manufacturing businessfor the time required to produce, store and distribute our productssuccessfully. Our manufacturing levels, while important to us, can representrelatively small fractions of the overall business of most qualified contractmanufacturers. As a result, the contract manufacturers may not provide us withthe attention that we need or may be unwilling to adapt to necessary changes inour manufacturing requirements.

Drug manufacturers aresubject to ongoing periodic unannounced inspection by FDA and correspondingstate and foreign agencies to ensure strict compliance with cGMPs, othergovernment regulations and corresponding foreign standards. While we areobligated to audit the performance of third party contractors, we do not havecontrol over our third-party manufacturers’ compliance with these regulationsand standards. Failure by our third-party manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, injunctions, civil penalties, failure of the government to grant marketapproval of drugs, delays, suspension or withdrawal of approvals, seizures orrecalls of product, operating restrictions and criminal prosecutions, any ofwhich could significantly and adversely affect our business.

***Materials necessary to manufacture our products may not beavailable, which may delay our development and commercialization activities.***

Only a few facilitiesmanufacture some of the raw materials necessary to manufacture our products. Ifwe need to purchase a raw material that is in limited supply for our clinicaltrials, or for commercial distribution if we obtain marketing approval of aproduct candidate, we cannot assure you that one or more suppliers would be ableto sell us that raw material at the time we need it and on commerciallyreasonable terms. If we change suppliers for any of these materials or any ofour suppliers experiences a shutdown or disruption in the facilities used toproduce these materials, due to technical, regulatory or other problems, itcould harm our ability to manufacture our products or receive regulatoryapproval.

***We have no experience selling, marketing or distributing ourproducts and no internal capability to do so.***

If we receive regulatoryapproval to commence commercial sale of any product, we will face competitionwith respect to commercial sales, marketing and distribution. These are areasin which we have no experience. To market any of our products directly, we mustdevelop a direct marketing and sales force with technical expertise andsupporting distribution capability. Alternatively, we may engage apharmaceutical or other healthcare company with an existing distribution systemand direct sales force to assist us. There can be no assurance that we willsuccessfully establish sales and distribution capabilities either on our own orin collaboration with third parties or gain market acceptance for our products.To the extent we have or will enter co-promotion or other licensingarrangements, any revenues we receive will depend on the efforts of thirdparties and there can be no assurance that our efforts will succeed.

***Our potential product trade names may not be acceptable toFDA.***

FDA reserves the right toapprove product names prior to commercialization.  We have proposed to FDA the tradenameImagify, as well as an alternative tradename, as a potential product trade namefor our lead product.  FDA has raisedconcerns regarding the name Imagify which, if not resolved, could cause us touse the alternative name which they find acceptable.  Trade names changes could 

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result in additional costto us and could adversely affect our preparations for commercialization of thisproduct which could adversely affect our business, financial condition andresults of operations.

***Claims by other parties that we infringe or havemisappropriated their proprietary technology may result in liability fordamages, royalties, or other payments, or stop our development andcommercialization efforts.***

Competitors and otherthird parties may initiate patent litigation against us in the United States orin foreign countries based on existing patents or patents that may be grantedin the future. Many of our competitors have obtained patents covering productsand processes generally related to our products and processes, and they mayassert these patents against us. Moreover, there can be no assurance that thesecompetitors have not sought or will not seek additional patents that may coveraspects of our technology. As a result, there is a greater likelihood of apatent dispute than would be expected if our competitors were pursuingunrelated technologies.

While we conduct patentsearches to determine whether the technologies used in our products infringepatents held by third parties, numerous patent applications are currentlypending and may be filed in the future for technologies generally related toour technologies, including many patent applications that remain confidentialafter filing. Due to these factors and the inherent uncertainty in conductingpatent searches, there can be no guarantee that we will not violate third-partypatent rights that we have not yet identified.

We know of U.S. andforeign patents issued to third parties that relate to aspects of our productcandidates. There may also be patent applications filed by these or otherparties in the United States and various foreign jurisdictions that relate tosome aspects of our product candidates, which, if issued, could subject us toinfringement actions. In particular, we are aware of U.S. and foreign patentsowned by third parties, including potential competitors, which arguably coveraspects of our Imagify contrast agent. We and several of these parties havebeen actively engaged in opposing the grant of European patents with claimsthat arguably cover aspects of our Imagify product. Parties may contest patentsin Europe prior to contesting the counterpart patents in the United Statesbecause of procedural differences between European and U.S. patent laws as wellas economic considerations.

The owners or licenseesof these and other patents may file one or more infringement actions againstus. In addition, a competitor may claim misappropriation of a trade secret byan employee hired from that competitor. Any such infringement ormisappropriation action could cause us to incur substantial costs defending thelawsuit and could distract our management from our business, even if theallegations of infringement or misappropriation are unwarranted. A need todefend multiple actions or claims could have a disproportionately greaterimpact. In addition, either in response to or in anticipation of any suchinfringement or misappropriation claim, we may enter into commercial agreementswith the owners or licensees of these rights. The terms of these commercialagreements may include substantial payments, including substantial royaltypayments on revenues received by us in connection with the commercialization ofour products. Payments under such agreements could increase our operatinglosses and reduce our resources available for development activities.Furthermore, a party making this type of claim could secure a judgment thatrequires us to pay substantial damages, which would increase our operating lossesand reduce our resources available for development activities. A judgment couldalso include an injunction or other court order that could prevent us frommaking, using, selling, offering for sale or importing our products or preventour customers from using our products. If a court determined or if weindependently concluded that any of our products or manufacturing processesviolated third-party proprietary rights, our clinical trials could be delayedand there can be no assurance that we would be able to reengineer the productor processes to avoid those rights, or to obtain a license under those rightson commercially reasonable terms, if at all.

***If we are unable to protect our intellectual propertyrights, our competitors may develop and market products with similar featuresthat may reduce demand for our products, and we may be prevented fromestablishing collaborative relationships on favorable terms.***

The following factors areimportant to our success:

·   receiving patent protection forour product candidates;

·   maintaining our trade secrets;

·   not infringing on theproprietary rights of others; and

·   preventing others frominfringing our proprietary rights.

We will be able toprotect our proprietary rights from unauthorized use by third parties only tothe extent that our proprietary rights are covered by valid and enforceablepatents or are effectively maintained as trade secrets.

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We try to protect ourproprietary position by filing U.S. and foreign patent applications related toour proprietary technology, inventions and improvements that are important tothe development of our business. Because the patent position of pharmaceuticalcompanies involves complex legal and factual questions, the issuance, scope andenforceability of patents cannot be predicted with certainty. Patents, ifissued, may be challenged, invalidated or circumvented. Thus, any patents thatwe own or license from others may not provide any protection againstcompetitors. Our pending patent applications, those we may file in the future,or those we may license from third parties, may not result in patents beingissued. If issued, they may not provide us with proprietary protection orcompetitive advantages against competitors with similar technology.Furthermore, others may independently develop similar technologies or duplicateany technology that we have developed. The laws of many foreign countries donot protect our intellectual property rights to the same extent as do the lawsof the United States.

We also rely on tradesecrets, know-how and technology, which are not protected by patents, tomaintain our competitive position. We try to protect this information byentering into confidentiality agreements with parties that have access to it,such as our corporate partners, collaborators, employees and consultants. Anyof these parties may breach the agreements and disclose our confidentialinformation or our competitors might learn of the information in some otherway. If any trade secret, know-how or other technology not protected by apatent were to be disclosed to or independently developed by a competitor, ourbusiness and financial condition could be materially adversely affected.

***We may become involved in lawsuits and administrativeproceedings to protect, defend or enforce our patents that would be expensiveand time consuming.***

In order to protect orenforce our patent rights, we may initiate patent litigation against thirdparties in the United States or in foreign countries. In addition, we have beenand continue to be subject to certain opposition proceedings conducted inpatent and trademark offices challenging the validity of our patents and maybecome involved in future opposition proceedings. The defense of intellectualproperty rights, including patent rights through lawsuits, interference oropposition proceedings, and other legal and administrative proceedings can becostly and can divert our technical and management personnel from their normalresponsibilities. Such costs increase our operating losses and reduce our resourcesavailable for development activities. An adverse determination of anylitigation or defense proceedings could put one or more of our patents at riskof being invalidated or interpreted narrowly and could put our patentapplications at risk of not issuing.

Furthermore, because ofthe substantial amount of discovery required in connection with intellectualproperty litigation, there is a risk that some of our confidential informationcould be compromised by disclosure during this type of litigation. For example,during the course of this kind of litigation and despite protective ordersentered by the court, confidential information may be inadvertently disclosedin the form of documents or testimony in connection with discovery requests,depositions or trial testimony. This disclosure could materially adverselyaffect our business and financial results.

***If we are unable to retain key personnel and hire additionalqualified scientific, manufacturing, sales and marketing, and other personnel,we may not be able to successfully achieve our goals.***

We depend on theprincipal members of our scientific and management staff. The loss of theseprincipal members’ services might significantly delay or prevent theachievement of research, development or business objectives and couldmaterially adversely affect our business, financial condition and results ofoperations. We do not maintain key person life insurance on any of theseprincipal members except for the CEO. We have entered into executive employmentagreements with key members of the management team that provide forcompensation and other benefits in the event these persons are terminated otherthan for cause, including in connection with a “change of control” ofAcusphere.

Our success depends, inlarge part, on our ability to attract and retain qualified scientific andmanagement personnel such as these individuals. We face intense competition forsuch personnel and consultants. We cannot assure you that we will attract andretain qualified management and scientific personnel in the future.

Further, we expect thatour potential expansion into areas and activities requiring additionalexpertise, such as further clinical trials, governmental approvals, commercialmanufacturing and marketing, will place additional requirements on ourmanagement, operational and financial resources. We expect these demands willrequire an increase in management and scientific personnel and the developmentof additional expertise by existing management personnel. The failure to attractand retain such personnel or to develop such expertise could materiallyadversely affect prospects for our success.

***We will establish collaborative relationships, and thoserelationships may expose us to a number of risks.***

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We will rely on a numberof significant collaborative relationships with pharmaceutical or otherhealthcare companies for our manufacturing, research funding, clinicaldevelopment and/or sales and marketing performance. Reliance on collaborativerelationships poses a number of risks, including the following:

·wecannot effectively control whether our corporate partners will devotesufficient resources to our programs or product candidates;

·disputesmay arise in the future with respect to the ownership of rights to technologydeveloped with collaborators;

·disagreementswith collaborators could delay or terminate the research and development,regulatory approval or commercialization of product candidates, or result inlitigation or arbitration;

·corporatepartners may have considerable discretion in electing whether to pursue thedevelopment of any additional product candidates and may pursue technologies orproducts either on their own or in collaboration with our competitors; and

·collaboratorswith marketing rights may choose to devote fewer resources to the marketing ofour product candidates than they do to product candidates of their owndevelopment.

In July 2004, weentered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Therecan be no assurance that the regulatory goals, sales targets and otherobjectives of this agreement will be achieved. Failure to achieve these goals,targets and objectives would result in our inability to receive license,milestone, royalty and other payments under this agreement, which would have amaterial adverse impact on our business, financial condition and results ofoperations including, under certain conditions, reduction of royalty rates,delays in regulatory approvals and product sales, penalties and termination ofthe agreement. Under certain provisions of this collaboration agreement, if wefail in any material respect to use all commercially reasonable efforts tocarry out referenced obligations under the agreement, we would be obligated topay Nycomed liquidated damages of up to $12 million. Although we plan tocarry out all of these obligations, which we believe are in our control, therecan be no assurance that termination of this agreement will not occur or thatsuch termination would not result in us incurring liquidated damages of up to$12 million.

Given these risks, ourcurrent and future collaborative efforts may not be successful. Failure ofthese efforts could delay our product development or impair commercializationof our products, and could have a material adverse effect on our business,financial condition and results of operations.

***Competition in the pharmaceutical industry is intense, andif we fail to compete effectively our financial results will suffer.***

We engage in a businesscharacterized by extensive research efforts, rapid developments and intensecompetition. We cannot assure you that our products will compete successfullyor that research and development by others will not render our productsobsolete or uneconomical. Our failure to compete effectively would materiallyadversely affect our business, financial condition and results of operations.We expect that successful competition will depend, among other things, onproduct efficacy, safety, reliability, availability, timing and scope ofregulatory approval and price. Specifically, we expect important factors willinclude the relative speed with which we can develop products, complete theclinical, development and laboratory testing and regulatory approval processesand supply commercial quantities of the product to the market.

We expect competition toincrease as technological advances are made and commercial applicationsbroaden. In commercializing our initial product candidates and any additionalproducts we develop using our HDDS and PDDS technologies, we will facesubstantial competition from large pharmaceutical, biotechnology and othercompanies, universities and research institutions.

·  Imagify,our cardiovascular drug and lead product candidate, if approved for marketingand sale, will compete with nuclear stress tests, the current standard of carein myocardial perfusion imaging. Nuclear contrast agents that are approved foruse in myocardial perfusion imaging include products marketed by GE Healthcareand Bristol-Myers Squibb. In 2005, the reimbursement rate of a nuclear stresstest was approximately $800 per procedure. In addition, GE Healthcare andBristol-Myers Squibb have developed and marketed ultrasound contrast agentsthat have been used for Left Ventricular Opacification, or LVO, and EndocardialBorder Delineation, or EBD, in patients with suboptimal images.  No ultrasound contrast agent has been approvedby FDA for use in myocardial perfusion imaging using cardiac stress ultrasound.However, we are aware of other companies that are or may be developingultrasound contrast agents for use in cardiac stress ultrasound. CardioSphere,which is being developed by Point Biomedical Corporation, is an cardiac stressultrasound contrast agent for the assessment of myocardial perfusion.  It is our understanding that Point BiomedicalCorporation is working to design and commence a clinical trial in order topotentially gain regulatory approval for CardioSphere.  In addition, some companies have ultrasoundcontrast agents that are FDA approved for resting cardiac ultrasound evaluationof LVO and EBD in patients with suboptimal images or are in

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development. In the future, these companies may seek to broaden theirindications to include myocardial perfusion assessment with cardiac stressultrasound. These FDA-approved agents include Optison, which is marketed by GEHealthcare and Definity, which is marketed by Bristol-Myers Squibb. SonoVue isan ultrasound contrast agent marketed in Europe by Bracco for LVO and EBD andfor radiology applications.

·  AI-850,our reformulation of paclitaxel, if approved for marketing and sale, will alsoface intense competition.  We are awareof companies, such as American Pharmaceutical Partners, NeoPharm and SonusPharmaceuticals that are applying significant resources and expertise todeveloping reformulations of paclitaxel for intravenous delivery. In early2005, American Pharmaceutical Partners received FDA approval for and ismarketing their product. None of these other reformulations has receivedapproval from FDA. Other companies, such as Cell Therapeutics, are developingnew chemical entities that involve paclitaxel conjugated, or chemically bound,to another chemical. None of these new chemical entities have received finalapproval from FDA. In addition, a number of companies have developed technologyfor delivering hydrophobic drugs. Cardinal Health, CyDex and Elan have createdformulations of hydrophobic drugs that have been approved by FDA.

·  AI-128,our initial sustained release formulation of an inhaled asthma drug, ifapproved for marketing and sale, will also face intense competition. Companiessuch as Alkermes possess technology that may be suitable for sustained releasepulmonary drug delivery and may have competitive programs that have not beenpublicly announced or may decide to begin such programs in the future. We arenot aware of any other company currently in human clinical development of asustained release version of the asthma drug that is currently the subject ofour research and development efforts. In addition, many asthma drugs aremarketed by large pharmaceutical companies with much greater resources than us.These companies may be developing sustained release versions of their asthmadrugs that would compete with our sustained release product candidate.

Relative to us, most ofour competitors have substantially greater capital resources, research anddevelopment staffs, facilities and experience in conducting clinical trials andobtaining regulatory approvals, as well as in manufacturing and marketingpharmaceutical products. Many of our competitors may achieve productcommercialization or patent protection earlier than we will.  Furthermore, we believe that some of ourcompetitors have used, and may continue to use, litigation to gain acompetitive advantage. Finally, our competitors may use different technologiesor approaches to the development of products similar to the products we areseeking to develop.

***We expect to develop international operations that willexpose us to additional business risks.***

We expect, whetherdirectly or through collaborative relationships, to develop operations outsidethe United States in order to market and distribute our products. Regardless ofthe extent to which we seek to develop these operations ourselves or incollaboration with others, we cannot be sure that our international effortswill be successful. Any expansion into international markets will requireadditional resources and management attention and will subject us to newbusiness risks. These risks could lower the prices at which we can sell ourproducts or otherwise have an adverse effect on our operating results. Amongthe risks we believe are most likely to affect any international operationsare:

·  differentregulatory requirements for approval of our product candidates;

·  dependenceon local distributors;

·  longerpayment cycles and problems in collecting accounts receivable;

·  adversechanges in trade and tax regulations;

·  theabsence or significant lack of legal protection for intellectual propertyrights;

·  politicaland economic instability; and

·  currencyrisks.

**RisksRelated to Our Industry**

***Even if we obtain marketing approval, our products will besubject to ongoing regulatory review.***

If regulatory approval ofa product is granted, such approval may be subject to limitations on theindicated uses for which the product may be marketed or contain requirementsfor costly, post-marketing follow-up studies. As to products for whichmarketing approval is obtained, the manufacturer of the product and themanufacturing facilities will be subject to continual review and periodicinspections by FDA and other regulatory authorities. In addition, the labeling,packaging, adverse event reporting, storage, advertising, promotion and recordkeeping related to the product will remain subject to extensive regulatoryrequirements. The subsequent discovery of previously unknown problems with theproduct, manufacturer or facility may result in restrictions on the product orthe manufacturer,

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including withdrawal ofthe product from the market. We may be slow to adapt, or we may never adapt, tochanges in existing requirements or adoption of new requirements or policies.

If we fail to comply withapplicable regulatory requirements, we may be subject to fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

***Market acceptance of our products will be limited if usersof our products are unable to obtain adequate reimbursement from third-partypayors.***

Government healthadministration authorities, private health insurers and other organizationsgenerally provide reimbursement for products like our product candidates, andour commercial success will depend in part on these third-party payors agreeingto reimburse patients for the costs of our products. Even if we succeed inbringing any of our proposed products to market, we cannot assure you thatthird-party payors, in the United States, Europe and other markets that we maypursue, will consider our products cost-effective or provide reimbursement inwhole or in part for their use or agree to the proposed price.

Significant uncertainty existsas to the reimbursement status of newly approved health care products. Each ofour product candidates is intended to replace or alter existing therapies orprocedures. These third-party payors may conclude that our products are lesssafe, effective or cost-effective than these existing therapies or procedures.Therefore, third-party payors may not approve our products for reimbursement.

If third-party payors donot approve our products for reimbursement or fail to reimburse themadequately, sales will suffer as some physicians or their patients will opt fora competing product that is approved for reimbursement or is adequatelyreimbursed. Even if third-party payors make reimbursement available, thesepayors’ reimbursement policies may adversely affect the ability of us and ourpotential collaborators to sell our products on a profitable basis.

Moreover, the trendtoward managed healthcare in the United States, the growth of organizationssuch as health maintenance organizations, and legislative proposals to reformhealthcare and government insurance programs could significantly influence thepurchase of healthcare services and products, resulting in lower prices andreduced demand for our products which could adversely affect our business,financial condition and results of operations.

In addition, legislationand regulations affecting the pricing of pharmaceuticals may change in waysadverse to us before or after FDA or other regulatory agencies approve any ofour proposed products for marketing. While we cannot predict the likelihood ofany of these legislative or regulatory proposals, if any government orregulatory agencies adopt these proposals they could materially adverselyaffect our business, financial condition and results of operations.

***We may be required to defend lawsuits or pay damages inconnection with the alleged or actual harm caused by our products or productcandidates.***

We face an inherentbusiness risk of exposure to product liability claims in the event that the useof our products is alleged to have resulted in harm to others. This risk existsin clinical trials as well as in commercial distribution. In addition, thepharmaceutical and biotechnology industries in general have been subject tosignificant medical malpractice litigation. We may incur significant liabilityif product liability or malpractice lawsuits against us are successful.Furthermore, product liability claims, regardless of their merits, could becostly and divert our management’s attention from other business concerns, oradversely affect our reputation and the demand for our products. Although wemaintain product liability insurance, we cannot be certain that this coveragewill be adequate or that it will continue to be available to us on acceptableterms.

***Rapid technological change could make our products obsolete.***

Pharmaceuticaltechnologies have undergone rapid and significant change. We expect thatpharmaceutical technologies will continue to develop rapidly. Our future willdepend in large part on our ability to maintain a competitive position withrespect to these technologies. Any compounds, products or processes that wedevelop may become obsolete before we recover any expenses incurred inconnection with their development. Rapid technological change could make ourproducts obsolete, which could materially adversely affect our business,financial condition and results of operations.

***Our products involve the use of hazardous materials, and asa result we are exposed to potential liability claims and to costs associatedwith complying with laws regulating hazardous waste.***

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Our research anddevelopment activities involve the use of hazardous materials, includingchemicals and biological materials. We believe that our procedures for handlinghazardous materials comply with federal and state regulations. However, therecan be no assurance that accidental injury or contamination from thesematerials will not occur. In the event of an accident, we could be held liablefor any damages, which could exceed our available financial resources. Thisliability could materially adversely affect our business, financial conditionand results of operations.

We are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of hazardous materials and waste products, andwe spent approximately $2,880 during the six months ended June 30, 2007 todispose of these hazardous materials and waste products. We may be required toincur significant costs to comply with environmental laws and regulations inthe future that could materially adversely affect our business, financialcondition and results of operations.

**RisksRelated to Our Common Stock**

***We expect that our stock price will fluctuate significantly.***

The stock market,particularly in recent years, has experienced significant volatilityparticularly with respect to pharmaceutical and biotechnology stocks. An activepublic market for our common stock may not continue to develop or be sustained.The volatility of pharmaceutical and biotechnology stocks and the level oftrading in the stock does not always relate to the operating performance of thecompanies represented by the stock. Factors that could cause this volatility inthe market price of our common stock include:

·  announcementsof the introduction of new products by us or our competitors;

·  announcementsof clinical trial results;

·  marketconditions in the pharmaceutical and biotechnology sectors;

·  rumorsrelating to us or our competitors;

·  litigationor public concern about the safety of our potential products;

·  ourquarterly operating results;

·  deviationsin our operating results from the estimates of securities analysts;

·  salesby us of additional shares of our common or preferred stock; and

·  FDAor international regulatory actions.

The market price of ourcommon stock may also fluctuate in response to the exercise by us of rightsunder the terms of our 6.5% convertible exchangeable preferred stock. Forexample, we may elect to automatically convert the preferred stock if ourcommon stock price has exceeded 150% of the conversion price of the preferredstock for at least 20 trading days during a 30-day trading period ending withinfive trading days prior to the notice of automatic conversion. There is a risk offluctuation in the price of our common stock between the time when we may firstelect to automatically convert the preferred stock and the automatic conversiondate. These fluctuations may adversely affect the value of our common stock.

***If shares under our universal shelf registrationstatement are issued, then the price of our securities may be negativelyaffected.***

We have on file with the SEC a universal shelf registrationstatement on Form S-3 (Registration No. 333-134263) and a universal shelfregistration statement on Form S-3 (Registration No. 333-123854), which providefor the offer, from time to time, of common stock, preferred stock, debtsecurities and warrants up to an aggregate remaining availability ofapproximately $3.5 million and $27.3million, respectively, net of financing amounts previously executed under theseregistration statements and amounts reserved for up to $30.0 million inpotential financing under the equity line of credit arrangement we entered intoin August 2006 with Azimuth Opportunity, Ltd. The SEC declared the shelfregistration statements effective on August 18, 2006 and April 15, 2005,respectively.  Subject to market conditions and our capital needs, and solong as we are then eligible to use the registration statements under SECrules, we may again seek to use any remaining availability under the shelfregistration statements by making an offering of securities covered for saleunder the registration statements. In addition, we may amend our shelfregistration statements or file a new shelf registration statement to increaseour potential access to capital. The addition of these securities into themarket may be dilutive to existing stockholders and have an adverse effecton the price of our securities.

***If we sell shares of our common stock under ourequity line of credit arrangement , then the price of our securities may benegatively affected.***

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In August 2006, weentered into what is sometimes termed an equity line of credit arrangement withAzimuth Opportunity Ltd.  The arrangement provides that, upon the termsand subject to the conditions set forth therein, Azimuth is committed topurchase up to $30.0 million of our common stock, or up to approximately 5.8million shares of common stock, whichever occurs first, over the 18-month termof the agreement.  From time to time during the term of the agreement, andat our sole discretion, we may present Azimuth with draw down notices requiringAzimuth to purchase our common stock.  The per share purchase price forthese shares will equal the daily volume weighted average price of the commonstock on each date during the draw down period on which shares are purchased,less a discount ranging from 3.875% to 5.875%, based on the volume weightedaverage price of the common stock.  As a result, our existing commonstockholders will experience immediate dilution upon the purchase of any sharesof our common stock by Azimuth under this agreement.  The sale of shares under this equity line will bedilutive to existing stockholders and may have an adverse effect on the priceof our securities.

***Our significant equity holders may have conflicts ofinterests with us or you in the future.***

As of August 6, 2007, andbased on information provided to us by such entities: QuakerCapital Management Corporation and their respective affiliates beneficially ownapproximately 7% of our outstanding common stock; Bank of America Corporation,Columbia Management Advisors, and their respective affiliates beneficially ownapproximately 6% of our outstanding common stock; the Endowment Capital GroupLLC and its affiliates beneficially own approximately 6% of our outstandingcommon stock; MLM Partners and its respective affiliates beneficially ownapproximately 5% of our outstanding common stock; Deutsche Bank AG beneficiallyowns approximately 5% of our outstanding common stock; and each of the BaupostGroup LLC, Meditor Group LLC, and their respective affiliates own approximately4% of our common stock. Collectively these investors will control approximately37% of our outstanding common stock. These investors, particularly if they were to act together as aconcentrated group, could exert influence over the election of our directors,direct our policies and operations, including future issuances of common stockor other securities, the payments of dividends, if any, on our common stock,the incurrence of debt by us, amendments to our Amended and RestatedCertificate of Incorporation and Amended and Restated Bylaws and entering intoof extraordinary transactions, and their interests, as a concentrated group,may not in all cases be aligned with your interests. This concentration ofownership among a small number of investors may make it more difficult forother stockholders to influence matters requiring stockholder approval and mayhave the effect of delaying, preventing or deterring a change in control of ourcompany, thereby possibly depriving our stockholders of an opportunity toreceive a premium for their common stock as part of any sale or acquisition.

***Our common stock is junior to our preferred stock withrespect to the right to receive payments in the event of a dissolution,liquidation or winding up of Acusphere.***

In February 2005, weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of August 6, 2007, 690,000 of these shares of preferred stock areoutstanding. The preferred stock is senior to the common stock as toliquidation. In the event of our voluntary or involuntary dissolution,liquidation or winding up of Acusphere, holders of our preferred stock willreceive a liquidation preference in an amount equal to $50 per share, plus allaccrued and unpaid dividends through the distribution date. Only after holdersof the preferred stock have received their liquidation preference and anyaccrued and unpaid dividends will we distribute assets, if any are remaining,to our common stock holders.

***Acusphere could  bethe subject of securities class action litigation due to future stock pricevolatility.***

In the past, when themarket price of a stock has been volatile, holders of that stock have ofteninstituted securities class action litigation against the company that issuedthe stock. The market price of our common stock has been historically volatileand may remain volatile. Such volatility in our stock price could result inshareholder litigation against us.  Ifany of our stockholders brought a lawsuit against us, we could incursubstantial costs defending the lawsuit. The lawsuit could also divert the timeand attention of our management.

***Future sales of common stock by our existing stockholdersmay cause our stock price to fall.***

The market price of ourcommon stock could decline as a result of sales by our existing stockholders ofshares of common stock in the market, or the perception that these sales couldoccur. These sales might also make it more difficult for us to sell equitysecurities at a time and price that we deem appropriate. As of August 6, 2007,we have approximately 46,181,860 shares of common stock outstanding and 690,000shares of convertible preferred stock outstanding that are convertible intoapproximately 5.0 million shares of our common stock, plus up to a maximum ofapproximately 0.7 million additional shares of our common stock issuable at ouroption in satisfaction of the maximum dividend make-whole payment on theseshares of preferred stock. All of the shares of common stock

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issuable upon conversionof our preferred stock will be freely tradable without restriction under thefederal securities laws unless purchased by our affiliates.

***The terms of our outstanding shares of preferred stock mayrestrict our ability to raise additional capital or hamper or prevent anacquisition of us.***

In February 2005, weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of August 6, 2007, 690,000 of these shares of preferred stock areoutstanding. In the event of our voluntary or involuntary dissolution,liquidation or winding up of Acusphere, holders of our preferred stock willreceive a liquidation preference in an amount equal to $50 per share, plus allaccrued and unpaid dividends through the distribution date. Only after holdersof the preferred stock have received their liquidation preference and anyaccrued and unpaid dividends will we distribute assets, if any are remaining,to our common stock holders. Without the vote or consent of the holders of atleast a majority of the shares of preferred stock, we can not authorize or sellany equity security that ranks senior to the preferred stock as to dividends ordistributions of assets upon liquidation, dissolution or winding up ofAcusphere. As a result of this liquidation preference, it may be difficult forus to raise additional capital through the sale of common stock or juniorpreferred stock on acceptable terms, or at all.

In addition, without thevote or consent of the holders of at least a majority of the shares ofpreferred stock we may not effect a consolidation or merger with another entityunless the preferred stock that remains outstanding and its rights, privilegesand preferences are unaffected or are converted into or exchanged for preferredstock of the surviving entity having rights, preferences and limitationssubstantially similar, but no less favorable, to the convertible preferredstock. This provision could hamper a third party’s acquisition of us ordiscourage a third party from attempting to acquire control of us via a merger.

***Under some circumstances, the holders of our outstandingshares of preferred stock may be entitled to elect some of the directors ofAcusphere.***

In February 2005 weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of August 6, 2007, 690,000 of these shares of preferred stock areoutstanding. Cumulative dividends accrue on our preferred stock at an annualrate of $3.25 per share, payable quarterly on the first day of March, June,September and December, commencing June 1, 2005. Any dividends mustbe declared by our board of directors and must come from funds that are legallyavailable for dividend payments. If we have not paid dividends on the preferredstock in an aggregate amount equal to at least six quarterly dividends whetheror not consecutive, we must increase the size of our board of directors by twoadditional directors. After this time, and for so long as these dividendsremain due and unpaid, holders of the preferred stock, voting separately as aclass with holders of preferred stock ranking on the same basis as to dividendshaving like voting rights, will be entitled to elect two additional directorsat any meeting of stockholders at which directors are to be elected. Thesedirectors will be appointed to classes on the board as determined by our boardof directors. These voting rights will terminate when we have declared andeither paid or set aside for payment all accrued and unpaid dividends. Theterms of office of all directors so elected will terminate immediately upon thetermination of these voting rights.

***Provisions of Delaware law or our charter documents coulddelay or prevent an acquisition of us, even if the acquisition would bebeneficial to our stockholders, and could make it more difficult for you tochange management.***

Provisions of Delawarelaw or our charter or by-laws could hamper a third party’s acquisition of us,or discourage a third party from attempting to acquire control of us.Stockholders who wish to participate in these transactions may not have theopportunity to do so. These provisions could also limit the price thatinvestors might be willing to pay in the future for shares of our common stock.Further, these provisions make it more difficult for stockholders to change thecomposition of our board of directors in any one year.

These provisions include:

·  aprovision allowing us to issue preferred stock with rights senior to those ofthe common stock without any further vote or action by the holders of thecommon stock;

·  theexistence of a staggered board of directors in which there are three classes ofdirectors serving staggered three-year terms, thus expanding the time requiredto change the composition of a majority of directors and potentiallydiscouraging someone from making an acquisition proposal for us;

·  theby-laws’ requirement that stockholders provide advance notice when nominatingour directors;

·  theinability of stockholders to convene a stockholders’ meeting without thechairperson of the board, the chief executive officer, the president or amajority of the board of directors first calling the meeting; and

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·  theapplication of Delaware law prohibiting us from entering into a businesscombination with the beneficial owner of 15% or more of our outstanding votingstock for a period of three years after the 15% or greater owner first reachedthat level of stock ownership, unless we meet specified criteria.

***We have never paid dividends on our common stock, and we donot anticipate paying any cash dividends on our common stock in the foreseeablefuture.***

We have paid no cashdividends on our common stock to date and, other than cash dividends paid onour preferred stock, we currently intend to retain our future earnings, if any,to fund the development and growth of our businesses. In addition, the terms ofany future debt or credit facility may preclude us from paying these dividends.As a result, capital appreciation, if any, of our common stock will be yoursole source of gain for the foreseeable future.

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

At our AnnualMeeting of Stockholders held on June 26, 2007, the stockholders approved thefollowing:

Elected two people to serve as Class I directors asfollows:
| Director        | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-----------------|------------|--------------------|------------|-------------------------|------------|
| Sherri C. Oberg |       | 31,482,828         |       | 1,068,012               |       |
| Sandra Fenwick  |       | 31,519,245         |       | 1,031,595               |       |

 
|                                                                                  | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstain** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-------------|------------|
| Approve the proposed  Amended and Restated 2005 Stock Option and Incentive Plan: |       | 11,434,491         |       | 4,353,279              |       | 2,078,321   |       |

 
|                                                                                                        | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstain** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-------------|------------|
| Ratification of  Deloitte & Touche LLP as independent registered public accounting firm  for 2007: |       | 32,348,252         |       | 153,861                |       | 48,726      |       |

 

**ITEM5. OTHER INFORMATION**

Our policy governingtransactions in its securities by its directors, officers and employees permitsits officers, directors and certain other persons to enter into trading planscomplying with Rule 10b5-1 under the Securities Exchange Act of 1934, asamended. We have been advised that, in accordance with Rule 10b5-1 and ourpolicy governing transactions in its securities, such a plan has been enteredinto with provisions requiring that any trading of securities thereunderis to be reported when and if it occurs in accordance with applicable law.We undertake no obligation to update or revise the information provided herein,including for revision or termination of an established trading plan.

**ITEM6. EXHIBITS**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                                            |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                               |
| 10.1            |       | Amended and Restated 2005 Stock Option and Incentive  Plan (Incorporated by reference to Annex D to the registrant’s Proxy  Statement on Form DEF 14-A, filed with the Securities and Exchange Commission  on April 30, 2007) |
|            |       |                                                                                                                                                                                                                               |
| 10.2            |       | Form of Promissory Note with General Electric  Capital Corporation (Incorporated by reference to Exhibit 10.2 to the                                                                                                               |

 

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|        | registrant’s Current Report on Form 8-K, filed with  the Securities and Exchange Commission on May 18, 2007) |
|--------|-------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                              |
| 31.1*  | Rule 13a-14(a) / 15d-14(a) Certification                                                                          |
|   |                                                                                                              |
| 31.2*  | Rule 13a-14(a) / 15d-14(a) Certification                                                                          |
|   |                                                                                                              |
| 32.1*  | Section 1350 Certifications                                                                                  |
|   |                                                                                                              |

 

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** filed herewith*

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on this 8th day of August 2007.
|          | ACUSPHERE, INC. |
|----------|-----------------|
|     |            |   |
|     | By:             | /s/ Sherri C. Oberg |
|     |            | Sherri C. Oberg |
|     | * *        | *President and Chief Executive Officer* |
|     |            |   |
|     | By:             | /s/ Frederick W. Ahlholm |
|     |            | Frederick W. Ahlholm |
| * * | * *        | *Vice President of Finance* |
|     | * *        | *(Principal Financial  Officer and* |
|     | * *        | *Duly Authorized Officer)* |

 

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                                                 |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                    |
| 10.1            |       | Amended and Restated 2005 Stock Option and Incentive  Plan (Incorporated by reference to Annex D to the registrant’s Proxy  Statement on Form DEF 14-A, filed with the Securities and Exchange Commission  on April 30, 2007)      |
|            |       |                                                                                                                                                                                                                                    |
| 10.2            |       | Form of Promissory Note with General Electric  Capital Corporation (Incorporated by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on May 18, 2007) |
|            |       |                                                                                                                                                                                                                                    |
| 31.1*           |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                    |
| 31.2*           |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                    |
| 32.1*           |       | Section 1350 Certifications                                                                                                                                                                                                        |

 

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** filed herewith*

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